BANKING

CBK cuts base lending rate to 8.5 per cent

Naege: CBR is a reflection of tightening liquidity in the market, adding that the 50 basis point drop has will have no impact on bank rates or economy.

In Summary
  • Banks have pricing credit facilities at a maximum of 13 per cent since September when the MPC set CBR at nine per cent
  • The drop in the Central Bank Rate (CBR) will however not have an effect on bank lending rates after the interest capping law introduced in 2016 was scrapped
CBK Governor Patrick Njoroge has accused the Judiciary of delaying the recovery of Chase Bank cash. /FILE
CBK Governor Patrick Njoroge has accused the Judiciary of delaying the recovery of Chase Bank cash. /FILE

The Monetary Policy Committee has lowered the base lending rate to 8.5 per cent from nine per cent signaling commercial banks that they do not have to charge more despite the repeal of the rate cap law.

Unlike before the repeal of the rate cap, banks are now not obligated to price their loans at a maximum of four percent above the CBR.

''The MPC therefore decided to lower the Central Bank Rate (CBR) to 8.50 percent from nine per cent. The Committee will closely monitor the impact of this change in its policy stance,'' Central Bank of Kenya governor Patrick Njoroge said.

 
 

Banks have been pricing credit facilities at a maximum of 13 per cent since September when the MPC set CBR at nine per cent.

Cytonn senior manager for regional markets, Johnson Denge told the Star that the drop in CBR is a reflection of tightening liquidity in the market, adding that the 50 basis point drop  will have no impact on bank rates or economy.

''Now that the interest cap law was scrapped, CBK has no legal basis to apply a CBR. I expected the apex bank to reintroduce Kenya Bank Reference Rate (KBRR),'' Ndege said.

The KBRR is the average of the lowest interest rate charged by the CBK on loans to banks and the 91-day Treasury Bill rate, which can be thought of as the equivalent of the risk-free rate in the economy.

It allows consumers to have a low-risk benchmark when comparing the pricing of loan products.

In lowering the CBR rate, the MPC said the inflation expectations were well anchored within the target range, and that the economy was operating below its potential level.

Furthermore, the Committee noted the ongoing tightening of fiscal policy and concluded there was room for accommodative monetary policy to support economic activity.

 

The KBRR was at 8.9 per cent before the interest cap law came into force in September 2016.

The Committee welcomed the repeal of the interest rate caps on commercial bank loans, noting that they had led to a significant rationing of credit, particularly to the most vulnerable.

It noted that this will should restore the clarity of monetary policy decisions and strengthen the transmission of monetary policy.

Further, banks have adopted the Banking Sector Charter, which defines a commitment to entrench a responsible and disciplined banking sector which is cognizant of, and responsive to, the needs of their customers.

All eyes are now on commercial banks as they move to readjust lending rates in the new post interest cap regime.

Even so, early this month, Kenya Bankers Association’s chair Joshua Oigara said banks would raise interests by up to three per cent from the current limit of 13 per cent, meaning the highest rate will be 16 per cent.