The Central Bank of Kenya (CBK) through its Monetary Policy Committee (MPC) has reduced the Central Bank Rate (CBR) to 8.5% from 9% for the first time in 17 months. According to the CBK, the reduction is due to the economy operating below potential.
With the recent repeal of the interest rate cap, the CBK decided to lower the rate with the aim of compelling commercial banks to reduce their lending rates. The economy has been struggling as job layoffs increase as well as more businesses continue closing down due to high operating costs.
In lowering the CBR rate, access to credit is expected to increase thus increasing cash flow in the economy. According to the CBK, the credit to the private sector grew by 7% in September as compared to 6.6% in the 12 months to October. Private sector credit growth has remained below its five-year average in spite sectors such as consumer durable marking a sustained flow under the rate cap environment.
However, with the scrapping of the interest rate cap, the Government has no control over how commercial banks issue their loans. Therefore, there is no guarantee they will lower their interest rates.
According to Habil Olaka, CEO of Kenya Bankers Association, lenders will consider other tools beyond the benchmark rate when pricing their loans, including government borrowing which influences the cost of long-term deposits and in turn have an effect on borrowing rates.
“There are a number of benchmarks, the CBR being one of them; banks can use the T-Bill rates, or internal benchmarks as a base on which to price their loans,” he said.
On the other hand, Patrick Njoroge, CBK Governor, said that Kenyans should be at ease as the banking sector has moved away from the high charges that led to the need for the interest rate cap in the first place.
“Banks will not be going back to the same old way of the past, the wild west kind of banditry. We have explained on how exactly banks need to be responsible,” he said.