Central Bank under pressure as it sets benchmark rate

Central Bank Governor Dr Patrick Njoroge (Centre) flanked by CBK directors Gerald Nyaoma (Left) and Charles Koori (Right) during a Senate Finance Committee hearing on July 27, 2015. CBK may be forced to increase the benchmark lending rate later this month. PHOTO | DIANA NGILA | NATION MEDIA GROUP

What you need to know:

  • Benchmark lending rate is crucial in determining cost for loans which are priced based on KBRR and relative risks.

  • CBK maintained CBR at 11.5 per cent last month but is currently under pressure with inflation having risen to 8.01 in December, which is above the 7.5 target.

The Central Bank may be forced to increase the benchmark lending rate later this month, a move that will go against its own push to lower the cost of borrowing.

The Kenya Banks Reference Rate (KBRR) which was set at 9.87 in July 2015, is up for review with expectations that it will jump to a double figure.

The Central Bank (CBK) has been urging banks to lower their lending rates following the slashing of the reference rate.

However, an increase in KBRR will be used by the lenders to justify maintaining their rates high.

The benchmark is crucial in determining cost for loans which are priced based on KBRR and relative risks.

Late last year, banks increased their lending rates based on the movement of government securities which shot up.

However the lenders have been sluggish in lowering the cost of borrowing as interests on government paper came down.

“We cannot tell how it (KBRR) will move because it will also depend on the Central Bank Rate (CBR) which is difficult to tell how it will move,” Kenya Bankers Association CEO Habil Olaka said.

KBRR is computed as an average of the CBR and the two-month weighted moving average of the 91-day Treasury bill rate.

The CBK maintained CBR at 11.5 per cent last month but is currently under pressure with inflation having risen to 8.01 in December, which is above the 7.5 target.

Speculation is already rife in the money market that interest rates are likely to go up with expectations that short-term government notes will rise.

Treasury bill rates are already pushing upwards with the 91-day T-bill selling at 11.398 cent last week, after falling to a single digit last November. The 182-day T-bill rose to 13.164 per cent.

It is speculated that the government’s short-term notes might edge even higher with the Treasury facing a Sh85 billion bill of maturing debt this month.

Last year when the government was confronted with a cash crunch, the 91-, 182- and 364-day papers hit a high of 22.5 per cent, 22.3 per cent and 22.4 per cent, respectively.

“There is a lot of speculation in the market but we expect the CBR to remain contact although the KBRR might go up on the movement of the 91-day T-bill rates over the last two months,” Sterling Capital trader Eric Munywoki said.

He pointed out that the government may opt to roll over the maturing debt to ease refinancing pressure.

The government has also been trying to offer long-term bonds to reduce the pressure for financing the budget through short-term loans.