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Surprise Kenya rate cut puts lending rate cap in focus

The 50 basis point cut in the benchmark lending rate to 9.5% took much of the market by surprise, with seven of 11 analysts polled by Reuters having forecast no change.

Kenya's Finance Minister Henry Rotich. Picture: @HKRotich/Twitter

NAIROBI - Kenya’s central bank cut base interest rates for the first time since September 2016 on Monday, fuelling talk that a government cap on commercial lending rates introduced in the same month will be modified or removed soon.

The 50 basis point cut in the benchmark lending rate to 9.5% took much of the market by surprise, with seven of 11 analysts polled by Reuters having forecast no change.

The bank’s monetary policy committee said the inflation outlook was benign while economic growth remained short of its potential.

“There was scope for easing (the) monetary policy stance in order to support economic activity,” it said.

With the International Monetary Fund putting pressure on Nairobi to ditch the lending cap, set at 4 percentage points above base rates, Finance Minister Henry Rotich said last week it was unsustainable and the government was planning to change it.

Jibran Qureishi, East Africa economist at Stanbic Bank, said Thursday’s decision looked like a prelude to its removal in coming months.

“That is the rationale in addition to the need to stimulate the economy at a time when demand-driven inflation is very low,” said Qureishi, who predicted the cut.

The government introduced the cap in September 2016, in a bid to lower loan costs for individuals and businesses.

But the measure has had the effect of stifling the credit market as banks became more cautious in their lending practices, as economists predicted.

Private sector credit grew just 2.1% in the year to February, well below the central bank’s target rate of 12-15%.

The bank has said the cap would make the effectiveness of monetary policy uncertain. It noted the risk of “perverse outcomes” after its previous policy meeting in January, when it also said there was room for a more monetary accommodation in the near term.

Kenya’s year-on-year inflation rate stood at 4.5% last month, well within the government’s preferred band of 2.5-7.5%.

Razia Khan, chief economist for Africa at Standard Chartered in London, who had also forecast a 50 basis point cut, said it was likely to spur the loan market.

“Given expectations that loan rate caps will be amended, we expect to see a moderately positive credit growth reaction in response,” she said.

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