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CBK monetary committee spares borrowers from rate hike agony

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Thousands of borrowers were spared from more expensive loans after the Central Bank of Kenya Monetary Committee left the benchmark rate unchanged against wide expectations of a hike.

CBK’s Monetary Policy Committee, which met yesterday afternoon, was largely expected to raise the cost of loans as it battled to contain the sharp fall of the Kenyan shilling against the US dollar.

 Patrick Ngugi Njoroge, the Central Bank of Kenya Governor (PHOTO: COURTESY)

But after the meeting, the decision-making organ announced that the benchmark rate had been retained at 11.50 per cent in anticipation that the recent tightening measures were sufficient and that there was more scope to support the shilling.

“The committee concluded that the measures taken in the previous meetings were yet to be fully transmitted to the economy,” the MPC said in a statement released late Wednesday evening.

A fourth consecutive monthly meeting of the committee is expected in September, to be the forth in as many months suggesting that the CBK was still apprehensive on the jittery foreign exchange rates, with the shilling currently trading at near four-year lows against the US dollar.

Among the reasons given for yesterday’s decision was that both tourism and agriculture were looking up, and that the higher expected foreign exchange inflows would support rising remittances to strengthen the local unit.

“The CBK’s Market Perceptions Survey of July 2015 showed optimism for increased foreign direct investment and recovery of key sectors of the economy. Early indications point to improved performance in tourism and agriculture,” reckoned the committee.

At the end of trading yesterday, the US dollar was exchanging at Sh101.10 after sustaining the gains reported on Tuesday. Typically the MPC meets once every two months, translating to six meetings a year.

September meeting will be the fourth in as many months, and the sixth in 2015. But the committee expressed confidence that the measures taken last month to increase the benchmark rate would discourage borrowing and consumption, while giving incentives to encourage savings.

“In particular, the impact of the increase in the Kenya Banks’ Reference Rate (KBRR) takes effect from August 2015. The MPC therefore decided to retain the CBR at 11.50 per cent in order to anchor inflation expectations,” the committee chaired by CBK Governor Dr Patrick Njoroge said, adding that it would use the instruments at its disposal to maintain overall price stability.

Retaining the benchmark rate at the levels announced four weeks ago on July 7, would be a major reprieve for borrowers who have already been informed of interest rate hikes by their respective commercial banks.

Equity Bank Chief Executive James Mwangi said CBK’s previous attempts to save the Shilling had sent mixed signals owing to the mismatch between the rise on the CBR rates by three per cent since June, and a much smaller raise of the KBRR of 1.33 per cent announced last month.

While his bank was waiting to for outcomes from yesterday’s meeting to make a lending rate revision, several other lenders had already effected the changes and informed borrowers of their new loan repayment plans. Average lending rates have been raised by up to three per cent, in changes that will take effect with the loan repayments due at end of August.

Since banks are required to issue their customers with a month’s notice before any reviews on interest rates, the last revision of the lending rates had not translated to higher loan repayments for borrowers and effectively, less disposable incomes. July was Dr Njoroge’s first MPC meeting he chaired where the KBRR was revised from 8.54 per cent to 9.87 per cent, giving cue to banks to raise interest rates. MPC defended the decision to raise rates citing that excess demand for goods and services had pushed up prices which, when combined with a weakening shilling, had the potential to destabilise markets.

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