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State austerity gifts borrowers cheaper loans

By Dominic Omondi | November 26th 2019
By Dominic Omondi | November 26th 2019
The removal of the rate cap is expected to lower restrictions on individual borrowers, though doubts still remain. [Courtesy]

The Central Bank of Kenya (CBK) has lowered the benchmark lending rate by 0.5 percentage points.

The Monetary Policy Committee (MPC) - CBK’s organ responsible for the formulation of monetary policy - yesterday lowered the Central Bank Rate (CBR) to 8.5 per cent, down from nine per cent. This has now set the stage for cheaper loans weeks after the interest rate cap was repealed. 

CBK cited the National Government’s austerity measures as one of the main reasons for lowering the key rate. This was the second adjustment in three years. The apex bank had left the lending rate untouched for the better part of the interest rate cap regime that came into effect in September 2016. 

The National Treasury has announced far-reaching austerity measures, which will see ministries, departments, and agencies significantly slash their spending as the government moves to tame its appetite for debt.

Also as part of tightening fiscal policy, the government has sought to ramp up tax revenues, a situation that will leave businesses with less disposable cash.

Besides tightening fiscal policy, MPC also cited an economy operating below its potential level as another reason for the benchmark rate adjustment.

“The MPC noted that inflation expectations remained well anchored within the target range and assessed that the economy was operating below its potential level. Furthermore, the committee noted the ongoing tightening of fiscal policy and concluded there was room for accommodative monetary policy to support economic activity,” said CBK Governor Patrick Njoroge in a statement.

However, the government’s appetite for debt could spoil the party as the rate at which Treasury issues its securities will determine the lending rate to households and firms. Already, Treasury has issued several government papers as it seeks to finance President Uhuru Kenyatta’s Big Four agenda projects and also refinance over 40 per cent of Treasury Bills maturing in less than 12 months. Habil Olaka, the chief executive of the Kenya Bankers Association, a lobby for banks, said he did not expect interest rates to go up.

“As a matter of fact, the rates were going down by the time the caps came,” said Mr Olaka, noting that the policies that had contributed to the decline are still in place.

Dr Njoroge has insisted that banks should not go back to the prohibitive rate of pre-September 2016, noting that several developments have been made to remedy this problem. “Loans should be priced responsibly, based on the customer’s risk profile and all positive and negative information from credit reference bureaus,” he said in a commentary in one of the dailies.

Under the controlled regime, banks would have charged interest rates of 12.5 per cent as the law required lenders to price loans at four percentage points above the CBR.

The committee welcomed the repeal of the interest rate cap on commercial bank loans, noting that they had led to significant rationing of credit, particularly to the most vulnerable.

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