NAIROBI: Although tightening of credit could ease pressure on the shilling and rein in inflation, bankers warn downside risks arising from the latest measure by Central Bank of Kenya (CBK) to raise both its policy and base rates could stifle credit uptake and business growth.
In its policy meeting on Tuesday, the banking sector regulator raised the Central Bank Rate (CBR) to 11.5 per cent from 10 per cent while also revising upwards the Kenya Bankers Reference Rate (KBRR) to 9.87 per cent from 8.54 per cent.
“Risks remain tilted towards a tighter monetary policy stance by the Central Bank, which could assist in easing off some of the pressures on the currency, but also poses a downside risk to output if the tightening results in a suppression of credit growth to the private sector,” according to Jibran Qureishi, an Economist at CfC Stanbic Bank.
Aly Khan Satchu, an independent analyst, warned that with the present slow-down in the economy, Kenya risks recording Gross Domestic Product (GDP) growth below 5 per cent this year.
“The economy has slowed for five consecutive quarters. We will surely now post a sub-5 per cent financial year GDP print. The real economy needs higher rates like a bullet in the head. I am convinced that at this time, raising interest rates will have the desired effect on the shilling, which still points at Sh107 to the US dollar,” he pointed out.
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Standard Investment Bank analyst Faith Mwangi said the bankers’ concerns are legitimate, given that a high interest rate environment would result in higher non-performing loans in the sector. “With the KBRR framework, loan rates will go up by 133 basis points, individual banks will adjust upwards the premium charged. With the higher interest rates payments, defaults on loans are inevitable,” she stated.
Ms Mwangi added that loan growth would be slower as borrowers shy off given the high rates. As it is, private sector credit growth in 2015 has been slow compared to previous years.
“With regards to currency, the new rate will offer temporary relief, though it will not address the weakness in current account position and muted foreign capital inflows,” she said.
The shilling hovered near a three-and-a-half-year low yesterday, reflecting a limited move a day after the Central Bank announced a surprise 150 basis point rise in its benchmark lending rate to fight inflation.
RATE DECISION
In early trade, commercial banks quoted the shilling at 100.40/50 to the dollar, compared with Tuesday’s close of 100.55/65 before the rate decision was announced. The shilling strengthened to around the 100 level when trading began but traders looking to buy dollars at a better rate quickly caused the shilling to weaken.
“We’re seeing (dollar) buyers, which is pushing the rate up,” said a trader at a major commercial bank, adding the 101 level is now “in sight”. “The problem is bigger than that,” the trader said, referring to the central bank’s action. I think they need to do more.”
The shilling has been weakening steadily in recent months, hurt by global dollar strength and a widening current account deficit, as well as declining tourism after a series of attacks by Somali militants scared away visitors. It is inching towards the all-time low of about 107 recorded in October 2011.
In increasing its benchmark lending rate to 11.50 per cent, the Monetary Policy Committee “noted elevated risks to the inflation outlook mainly attributed to pressures on the exchange rate over the last few months.”
