CBK unlikely to raise interest rate in third quarter, experts say in survey

What you need to know:

  • The base rate has been held at 10 per cent since September last year and is the main pricing tool for bank customer loans following the enactment of legislation capping rates in August 2016.
  • This was in spite of falling private sector credit growth, which stood at 2.1 per cent in May. Analysts say this is unlikely to move the ‘hold’ stance of the CBK.
  • Banks have deliberately slowed credit in favour of lending to the government.

Money market experts do not expect a hike in the base rate in this third quarter, saying a sluggish economy and implications on lending rates amid slower credit growth weigh against such a move.

Eight out of nine portfolio managers, economists and treasury dealers polled by city-based research firm HTM Capital say they expect the rate to hold steady when the Central Bank of Kenya monetary policy committee meets in September.

The base rate has been held at 10 per cent since September last year and is the main pricing tool for bank customer loans following the enactment of legislation capping rates in August 2016.

“The monetary policy framework is hamstrung by the interest rate controls such as an increase will not control inflation while a reduction will not necessarily spur credit to the private sector,” says a respondent in the poll.

“As long as elections are peaceful, and economy continues to move along, CBR is unlikely to change (unless there is a change in the global outlook that affects the shilling).”

However, should the economy slow down further—growth fell to 4.7 per cent in the first quarter of this year compared to 5.9 per cent in the same period of 2016 – CBK could come under pressure to make a rate cut.

In holding the rate steady, CBK cited lower core inflation and projection that headline inflation will keep falling in coming months, and stability in the forex market.

This was in spite of falling private sector credit growth, which stood at 2.1 per cent in May. Analysts say this is unlikely to move the ‘hold’ stance of the CBK.

“Economic fragility, credit market slowdown and declining inflation may support an easing policy bias.

However, this is unlikely given inflation remains above target and transmission channels may be ineffective in transmitting any change in policy signals,” said Commercial Bank of Africa economists in a note on the MPC meeting.

Banks have deliberately slowed credit in favour of lending to the government.

That means a rate cut would not move them as long as the Treasury is offering them a channel to make easy money.