Banks were yesterday handed another shocker after Central Bank's policy marking organs cut lending rates further, a week after the interest capping law became effective.
The CBK's Monetary Policy Committee cut the base lending rate by 50 basis points, automatically reducing the interest rates further to 14 per cent on account of the new banking law.
"This is a complete shock, I did not expect this, but rather thought we would be given time to stabilise after the new law," said a senior banker who sought anonymity.
The MPC, which was meeting for the first time after the enactment of the Banking Act Amendment Bill, 2015, said it had decided to lower the CBR
from 10.5 to 10 per cent since the demand pressures on inflation are moderate and expected to decline in the short-term. The CBR is the reference rate for pricing loans under the new law. The MPC meets every two months to determine country's fiscal policy.
“But the committee remains concerned about the persistent slowdown in private sector credit growth,” CBK said yesterday in a statement signed by governor Patrick Njoroge who chairs the MPC.
The rate cut came as a shock for many analysts and banks as majority had projected that the MPC would hold rate at 10.5 per cent to help the market stabilise after the enactment of the new law recently.
The popular law caps lending rates at four percentage points above the CBR and a floor on the deposit rates at 70 per cent of the CBR.
Analysts at fund management firm Cytonn said late on Monday that the new law now means the MPC would have credit pricing to consider in their decision making.
“In light of this, we are of the view that MPC will maintain the CBR at 10.5 per cent,” it said.
This is the second CBR rate cut in four months. In May, the MPC reviewed the key lending rate to 10.5 per cent
from 11.5 per cent previously.
Inflation shot up for the first time in June to 5.8 per cent from five per cent in May driven by higher cost of fuel and increased prices of several food items. Overall inflation rate stood at 6.26 per cent in August from 6.39 in July.