Prospects for the banking sector are dimming further as the treasuries market is bombarded with billions seeking good returns, slashing the State debt price at successive auctions.
The 182- and 364-day Treasury bills, a major source of interest income for lenders, this week continued on a downward trend after attracting over Sh8 billion more than was offered with the Treasury lowering rates for the accepted bids.
This comes even as central bank Monetary Policy Committee (MPC) on Tuesday cut the policy rate, now the official bank deposit and loan benchmark, from 10.5 per cent to 10 per cent in a bid to encourage lending and support growth.
Ecobank Research now says the Central Bank of Kenya (CBK) may even go for another cut of up to 50 basis points (bp) if oil price remain low and the US Federal Reserve does not make an aggressive rate hike this year.
“Prospects of further policy easing remain, especially given continued broad exchange rate stability (bolstered by improved export receipts and strong remittance inflows), and expectations of lower inflation (amid improved agricultural production and still-low fuel import prices),” Ecobank said in a research note.
“In view of these factors, we expect a further cut of at least 50bp before year end,” the statement read.
This means the rate could come down to 9.5 per cent before the year ends, effectively bringing down the cost of credit for the most expensive borrower to 13.5 per cent.
Incidentally, this will bring it near the Kenya Bank Reference Rate (KBRR), an indicative rate that lobbyists are pushing the regulator in court to use and which currently stands at 8.9 per cent.
Ecobank notes that lending to the private sector has reduced by over a third from 21.4 per cent a year ago to 7.2 per cent in July this year.
This was half of the 15.3 per cent target the CBK had set to support economic growth. The regulator has questioned data submitted by banks and has hinted that companies are getting other sources of funds such as foreign funding.
Ecobank however cautions that the regulator could be forced to raise interest rates if oil prices rise significantly pushing up domestic prices, or if key export markets go into recession.