Central Bank to retain benchmark rate, analysts say

Central Bank of Kenya (CBK) is unlikely to change the rate of borrowing when its monetary policy meeting convenes next week, analysts say. 

The analysts polled by The Standard say that with tame inflation, especially from low demand pressures, the Monetary Policy Committee will only meet to stick to the decision they first made in July last year to keep the benchmark rate at nine per cent.

“CBK will leave the Central Bank Rate (CBR) unchanged given that there is no inflation risk and pressures there are muted,” said Stanbic Bank Regional Economist for East Africa, Jibran Qureishi.

Justina Vuku, a research analyst at Sterling Capital, also said the rate is not likely to change on the low inflation figures.

The analysts said CBK could not lower rates because there was the risk that banks would reduce lending further even though in normal circumstances - without the rate cap law - the economy would have been ripe for lowering interest rates.

Private sector credit grew at a snail’s pace of 3.2 per cent last year, the lowest over the last 10 years yet CBK seems powerless to get banks to return to lending to small borrowers.

Banks argue that under the rate cap, they would rather lend exclusively to the Government since the National Treasury has less risk for the kind of return they can get for 13 per cent (current ceiling on interest rate).

The analysts say the situation right now actually calls for rising rates as the only option CBK has to increase private sector credit, although they do not see the apex bank taking this route.

“Raising rates would improve private sector credit growth because 10 banks would get some margin and be motivated to lend,” Ms Vuku said.

She, however, said Government pressure to borrow domestically, given the poor tax collection, will pressurise CBK not to pursue this option.