Analysts Say Rate Capping Remain a Constraint to Kenya’s Monetary Policy

maintain its prudent monetary policy stance

The sustained capping of commercial banks’ lending rates at 4 percentage points above the Central Bank of Kenya benchmark rate will remain a constraint to the conduct of monetary policy.

This is according to Commercial Bank of Africa (CBA) September monthly report after the National Assembly during the second reading of the Banking (Amendment) Bill 2019 were opposed to repealing it.

“The cap will remain a constraint to the conduct of monetary policy potentially limiting further adjustments to the policy rate, currently at 9.00%,” Says CBA.

“Even then, inflation and growth suggests that the current stance may still be appropriate. Inflation eased to 5.00% in August (July=6.30%) and may remain well within the target,” they add.

Genghis Capital further reiterate that, “Nonetheless, the timing of the Finance Bill 2019 debate remains a matter of
conjecture, with the effective date of most sections of the Bill still open-ended. This will heighten uncertainty in  in the market which is on the lookout for any signs of a modification in the interest controls.”

Kenya’s private sector activity has remained lethargic evident by the slack in income tax to the government attributed to cash flow challenges for businesses and consumers.
Private sector credit growth has stagnated below 6.00% in the last three years reflective of a reduction in lending.

In September 2016, In September, the Central Bank Governor,Dr. Patrick Njoroge also indicated that with the law coming into force it had complicated the conduct of the Monetary Policy Committee (MPC).

“Existing borrowers will benefit, but what happens to the riskier borrowers at the margin? They may be cut off from lending. It’s unclear which way this will go. We haven’t done it before,” he told the media

The analysts are of the view that inflation within target coupled with stubbornly high liquidity, should encourage the retention of the current central bank rate (CBR) at 9.00% in the upcoming MPC meeting scheduled for Monday 23rd September 2019.