Kenya Cuts Rates Weeks After Commercial Credit Cost Caps

  • Private-sector loan growth at 7.2% in July from 21.4% year ago
  • Credit slowdown bigger threat than inflation, one analyst says

The Central Bank of Kenya reduced its benchmark rate by 50 basis points to 10 percent, its second cut in four months, in a bid to boost private-sector credit amid government restrictions on loan costs.

“The Monetary Policy Committee noted the continued decline in growth of private sector credit, which has persisted since the last meeting, posing a risk to economic growth,” Governor Patrick Njoroge said Tuesday in an e-mailed statement from the capital, Nairobi.

Only one out of five economists polled by Bloomberg predicted the decision. The MPC lowered the rate from 10.5 percent, following a percentage point reduction in May.

The central bank raised its benchmark rate twice last year by a total of 300 basis points to 11.5 percent, which helped ease price growth to within a target band of 2.5 percent to 7.5 percent. Inflation slowed to 6.3 percent in August from an 8 percent peak at the end of 2015.

Financial Ructions

Cutting the benchmark rate may have been a “difficult decision” coming just weeks after the government enacted a law limiting commercial interest rates to 400 basis points above the central bank rate, Mark Bohlund, a London-based Bloomberg Intelligence economist, said by e-mail before the decision.

While Njoroge opposed legislating rates in the past, he has also said loan costs were “remarkably high” and asked banks to make a “credible down payment” to their customers.

The central bank may have recognized it needs to lower rates to check a slowdown in private-sector credit growth, Bohlund said. Growth in loans to the private sector shrank to a nine-year low of 7.2 percent year-on-year in July, from 21.4 percent a year earlier, according to central bank statistics.

“The ructions in the financial sector and the obstacles to credit expansion are likely to be viewed as a greater threat than inflation at the moment,” Bohlund said.

Kenya’s credit growth has been slowing since 2014 and has lagged gross domestic product expansion in the recent past, according to a Renaissance Capital note on Sept. 15.

Bumpy Ride

“It’s going to be a bumpy ride ahead for the banking sector,” Jibran Qureishi, a Nairobi-based economist at Stanbic Holdings Ltd., said by phone after the decision. “We see credit growth contracting even further. This will compromise the central bank’s ability to manage inflation. We expected them to take time to understand the transmission of the rate cap.”

The central bank said demand pressures on inflation were moderate and that it expects prices to keep falling in the short term.

Kenya’s inflation rate is “low enough to justify this move,” said Razia Khan, Standard Chartered Bank’s head of Africa research. While it may be the MPC’s view that cutting rates could ease financial conditions for borrowers finding it difficult to obtain credit, banks will be more risk averse, she said. 

“A cut may be seen as a means of stimulating the economy,” Khan said before the decision by e-mail. “However, there is more uncertainty attached to the decision than usual.”

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