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Bank rates unlikely to fall this year despite CBK push

By | November 28th 2009 at 00:00:00 GMT +0300

By Jackson Okoth

While signs of recovery have begun to slowly appear, Kenya’s economy is still in the woods.

" Although there are signs of economic recovery, the cost of credit has not come down to support it," said CBK governor Prof Njuguna Ndung’u.

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Ndung’u spoke On Friday during a press briefing to discuss a recent policy decision by the bank’s monetary policy committee (MPC) to lower CBK rate (CBR).

On Tuesday, the committee reviewed the CBR by 75 basis points to seven per cent, the fourth time this year — a signalling yet another signal for commercial banks to lower their lending rates.

Although banks have been reluctant to lower lending rates, citing weak demand and high credit risks, it still remains to be seen how the market will respond to this persistent moral persuasion by CBK.

Growth indicators

"We have seen a family of growth indicators in such sectors as tourism, cement demand and increased foreign exchange inflows into the current account," Prof Ndung’u said.

"These indicators show a gradual but steady growth environment for the future," he said. While Kenya National Bureau of Statistics (KNBS) is yet to release growth figures for the third quarter, CBK expects the growth at three per cent compared to a 3.5 per cent projection by the World Bank.

Despite this optimism, performance in the last quarter remains unpredictable and will depend on whether current rainfalls are sustained to ensure adequate food supply and electricity.

Due to the slow economy, companies have been accumulating raw materials and finished goods inventories, which has often led to weak demand for credit.

However, demand for credit by the private sector has increased in the last two months. Between September and October, demand for credit by the private sector increased by a whopping Sh19 billion.

However, CBK says credit is still tight owing to fear by banks to lend in an environment where loan default risks are high. CBK says banks are therefore unlikely to lower lending rates for the rest of this year.

CBK’s push for an expansionary monetary policy comes at the time when Treasury is implementing its fiscal stimulus package.

Since July this year, the Government has borrowed an estimated Sh31 billion from the domestic money market. This figure is expected to go up in when sale of the second Sh18.5 billion infrastructure bond is closed on by December 2.

The Government increased its borrowing from the domestic market — through issuance of infrastructure bonds — to finance a Sh109 billion budget deficit and cover for the gap left as a result of delays in floating a $500 million sovereign bond.

Signs of economic recovery seen include swelling tourist arrivals, tea output, upturn at the Nairobi Stock Exchange and growth in cement production — a percursor of vibrant building and construction sectors.

CBK says while the fiscal stimulus package is being disbursed, its effect would be felt next year.


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