Bankers have urged the Central Bank of Kenya (CBK) to further cut its benchmark rate at its final Monetary Policy Committee (MPC) meeting of the year on 5th December 2024.
- •Industry lobby group Kenya Bankers Association (KBA) argues that a further rate cut would provide a stronger signal to the market for lending rates to decline.
- •With inflation anchored within the lower target and the exchange rate maintaining medium term stability, the industry lobby holds that a significant rate cut would enhance economic activity through recovery in the private sector credit growth.
- •Bank lending to the private sector declined to 0.4% in September and near zero in October owing to higher borrowing costs in the high interest rate regime.
“There is scope for the Central Bank of Kenya to augment interest rates to reverse the declines in the private sector credit growth and support economic activity,” KBA remarked in a research note.
Commercial banks opted for investments in less risky assets such as government securities amid the elevated non performing loans ratio on private sector loans which stands at 16.5%.
“In view of these developments, and the need to reverse the decline in private sector credit growth, we argue for a further cut in the Central Bank Rate to provide a stronger signal to the market for lending rates to decline,” they added.
In August, the CBK kicked off its first easing campaign in a year with a 25 basis points rate cut, and a subsequent 75 basis points, bringing the benchmark rate to 12.00%. Despite the 1% cut in the interest rates, commercial banks are yet to fully adjust their lending rates downwards, with over half of the banks increasing their rates in October.
The latest data from the Kenya bureau of Statistics (KNBS) indicates a mild increase in inflation to 2.8% in November from 2.7% in October on rising food prices.
Global Developments Likely to Shape MPC’s Decision
The Federal Reserve has delivered a 0.75% cut in its benchmark rate in the last two meetings, to a target range of 4.50% – 4.75% , marking the beginning of an easing cycle since the onset of the global pandemic.
The European Central Bank delivered a 0.25% rate cut to 3.25% – the 3rd rate cut in 2024 – on the back of cooling inflation falling below the 2% target, and sluggish economic growth across the euro zone.
Central banks in Europe, England, Canada and some emerging markets including Kenya had already started cutting their benchmark rates months before the Fed. While the Fed might not be the trend setters in the easing cycle, they still play a vital role in the direction setting.
“When the US sneezes, the whole world catches a cold,”
Fed decisions have spillover effects to the world economies because they tend to impact foreign exchange markets since they affect the value of the US Dollar as the global reserve currency.
For emerging markets, most of their debt is in US dollar, changes in interest rates by the Fed boils down to changes in debt servicing costs.
However, economies including Nigeria, Japan, Turkey and Brazil are countering the easing trend with higher interest rates to tame inflationary pressures.