Central Bank of Kenya Lowers Interest Rate to 8.50% Since July 2018

High Market Liquidity Helps Kenya Treasury to Access Cheaper Deficit Financing

Central Bank of Kenya building

The  Central Bank of Kenya’s Monetary Policy Committee has cut interest rates by 50 basis points, to 8.50 percent since the repeal of the interest rate cap. 

It said the economy was operating below its potential.

“The MPC noted that inflation expectations remained well anchored within the target range, and assessed that the economy was operating below its potential level. Furthermore, the Committee noted the ongoing tightening of fiscal policy and concluded there was room for accommodative monetary policy to support economic activity,” said Dr. Patrick Njoroge, chair of the MPC.

This was in line with economic analysts’ expectations who had anticipated a rate cut. 

While this may be a welcome move in catalysing demand through affordable credit, more imperative is how effectively the signal is transmitted through the yield curve amidst divergent indicators from the fiscal side,” commented Economic Researchers from NCBA.

The Committee welcomed the repeal of the interest rate caps on commercial bank loans, noting that they had led to significant rationing of credit, particularly to the most vulnerable. 

In announcing its decision, the MPC  said, “This reform should restore the clarity of monetary policy decisions and strengthen the transmission of monetary policy.”

The meeting was held against a backdrop of domestic macroeconomic stability, the recent repeal of interest rate caps, and heightened global uncertainties and volatility in international markets.

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The International Monetary Fund (IMF) said the removal of the interest caps will provide greater flexibility for monetary policy.

Razia Khan, head of research for Africa at Standard Chartered Bank, as quoted by the Reuters, said there was little room for more monetary easing with inflation likely to rise before the end of 2020.

“With inflation likely to pick up … and in line with revived economic activity in Kenya, there may not be much room for the CBK to ease a lot more on a sustained basis,” Khan said.

However, an economist says the MPC’s action will not have much impact on the government ‘raiding’ liquidity from the market through parastatals.

“I understand why CBK cut the CBR by 50bps. They are probably anticipating adjustments in interest rates following the lifting of the interest rate cap. But this won’t do much-given banks can price new loans at whatever rate they want. CBR is just a signaling tool, nothing more!,  Mohamed Wehliye, an adviser with the Saudi Arabian Monetary Authority commented in a Tweet.

According to Wehliye, with the Government raiding the parastatals and therefore, sucking liquidity out of the system. “The CBK should have gone for the nuclear option and cut the CRR as  Gatundu South Legislator Moses Kuria noted the other day. The market is tight. Use a tool that actually injects cheap liquidity into the system.”

“The loss in parastatal deposits leads to high auction yields (which is a contra outcome to a CBR outcome) and also will slow down loan creation. Ni kazi bure tu the MPC wamefanya (its useless work the MPC has done). Cut CRR and stimulate the economy! He added.

However, during the Post MPC meeting held on Tuesday, Dr. Njoroge said Treasury would not force them to surrender surplus cash and government securities.

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“If the government is short of revenues and wants in a sense to assault the CBK and grab whatever resources there are, that has never worked and will never work. Such bailouts monetise the deficit one to one which means the central bank prints money, it will be printing money to cover the deficit and would draw the central bank as a conspirator in fiscal decisions this will subordinate the central bank to fiscal decisions and political imperatives,” he said.

If the government is short of revenues and wants in a sense to assault the CBK and grab whatever resources there are, that has never worked and will never work. Such bailouts monetise the deficit one to one which means the central bank prints money, it will be printing money to cover the deficit and would draw the central bank as a conspirator in fiscal decisions this will subordinate the central bank to fiscal decisions and political imperatives,” he said.

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(Last two paragraphs updated Post MPC meeting with remarks from the CBK Governor)