CBK cuts lending rate to 16.5%

It will be a while before banks lower their lending rates even after the Central Bank of Kenya cut its key lending rate by 1.5 per cent, it has emerged. After seven months of lending to commercial banks at 18 per cent, the Monetary Policy Committee of the CBK yesterday cut the rate to 16.5 per cent.

In a statement sent to newsrooms by CBK governor Njuguna Ndung'u, the MPC said an improved economic climate had informed its decision. Equity Bank CEO James Mwangi, while agreeing with the sentiments, said it will take some time for banks to follow through with rate cuts of their own as they first need to get depositors to adjust to lower returns on their money.

Initially, after criticism over a rapidly weakening shilling in the international currency markets last year, CBK introduced a series of rate hikes to to stabilise the local currency and arrest runaway inflation. Since December last year, it has held the rate at the punitive level of 18 per cent to discourage unnecessary borrowing and temper consumer demand that had fuelled inflation.

It also hoped to attract dollars from investors who would want take advantage of the high interest rates. As inflation remained high on the back of food and fuel prices, CBK maintained its rate. With the onset of long rains however, and a general decline in world oil prices, inflation came down from nearly 20 per cent to 10.06 per cent in June.

The shilling has also stabilised to around 83 to the dollar after tumbling to a low of 107 late last year. “In view of the above considerations, the Committee noted that the implementation of its monetary policy framework is working,” the statement read. “The Committee therefore decided to reduce the CBR by 150 basis points to 16.5 per cent.”

Following the rise in both the CBR and inflation, banks decided to hike their lending rates on loans and mortgages with borrowers seeing their monthly repayments escalate. With the easing of inflation some banks have begun to slightly ease their lending rates but this has also been complicated by their need to mobilise deposits by offering attractive interest rates to people who would otherwise put their money in government securities or the currently high-flying Nairobi Securities Exchange.

Bankers said the move was expected given a decline in inflation and the stabilisation of the shilling. “I think it is a clear signal from the CBK that it is now time to adjust the interest rates to support the economy,” Mwangi said. “As the liabilities side of the balance sheet adjusts, because the depositors must adjust to lower interest rates, then quickly the asset side or the loan book will also start going down.”

However, Mwangi noted that how quickly each bank responds will depend on its internal processes. “I think banks will respond at different times depending on the funding structure but Kenyans should expect that the banking industry will respond.” For Equity, Mwangi said, it will be a process that will go through its internal organs and will depend on how quickly the board gives its approval.

Commercial Bank of Africa MD Isaac Awuondo refused to comment, saying the paper should do its own research on how the Kenya Banker's Association has responded in the past. Standard Chartered PLC head of research for Africa Razia Khan said: “The Central Bank of Kenya surprises markets with a larger than expected 150bps rate cut, but also announces that it will be reverting to a two-monthly MPC meeting schedule. We expect market reaction to the rate cut to be overwhelmingly positive." “This was the right move – the right time, and the right magnitude.”