The Central Bank is optimistic cost of borrowing could start reducing in the near-term from the prevailing average of 18 per cent, in line with signal from its new monetary policy stance.
CBK governor Patrick Njoroge is also adamant the industry-wide base lending rate, the Kenya Banks Reference Rate, should be re-worked to have an impact on the pricing of loans by commercial banks.
The bank's top policy-setting committee on Monday cut the Central Bank Rate – the rate at which banks borrow from it as lender of last resort – by 100 basis points to 10.5 per cent, marking the first review since last July.
This was as a result of low expectations on inflationary pressures, a stable shilling and rising foreign exchange reserves, the Monetary Policy Committee said.
The conditions, Njoroge said yesterday, should help commercial banks to start lowering lending rates.
“We do not have a golden rule that you can attach to figure out what's the best rate,” the governor told a press conference, but decried high interest spreads of about 10 per cent.
Such higher margins “generally happen in countries that have gone through substantial shocks in their financial sector”, he said, adding the spreads should come down to below five per cent.
Research analysts were nonetheless skeptical about the MPC signal transmitting to lending rates, arguing the CBR has basically been realigned to other short-term interest rates like the Treasury Bills' yield.
“It is very unlikely there will be a huge shift for banks to lower rates after yesterday's (Monday's) move because the Central Bank Rate has not meant liquidity conditions have improved drastically,” said an analyst with a leading bank who did not want to be identified because of conflict of interest.
By ignoring the KBRR in January, the analyst said, the governor admitted the transmission mechanisms were not effective.
The CBK is working with the Kenya Bankers Association on a new instrument to replace the KBRR which was introduced in July 2014.
“KBRR was a rough instrument, we need to improve it, we know its limits a lot more,” Njoroge said. “It will not be an improved KBRR but something that substitutes it in terms of the intention of why we put the KBRR there.”