Central Bank of Kenya will Ease Policy if Parliament Reverses Rates Cap
Central Bank of Kenya building
The Central Bank of Kenya (CBK) is forecast to cut interest rates when its Monetary Policy Committee meeting to make a decision on the direction of the Central Bank Rate (CBR) on July 24, 2019.
Commercial Bank of Africa analysts say the tame inflationary pressures coupled with the output gap should limit any scope for monetary tightening.
“On the other hand, prospects of easing may be dented by prospects of pervasive outcome where easing causes markets to instead tighten. Therefore, the CBK may keep the CBR on hold unless parliament approves the reversal of the interest rates cap, restoring efficacy of monetary policy signaling.”
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When the MPC last met in May, held its lending rate at 9% attributed to the optimum performance of the general economy amidst volatility jitters both internally and externally.
With a proposal to repeal the law currently included in the Finance Bill 2019, Cytonn Investments says they “Expect an amendment of the law, possibly in the way of an increase in the margin from the current 4.0% above the Central Bank Rate (CBR).”
The Kenya Bankers Association (KBA) State of Banking Industry Report 2019, shows interest rate caps prompted adjustments that saw banks shift from riskier segments to investments that balance returns and asset quality.
The Banking (Amendment) Act, 2016 that introduced caps on lending rates have seen the market:
(i) gradually shift away from segments considered riskier
(ii) seek to optimise on investments that balance returns and asset quality
(iii) respond to both risks and returns balance depending on liquidity positions, which in themselves are a function of size of the bank and chosen market segment.
