NAIROBI, Kenya, Jul 27 – The Central Bank of Kenya (CBK) warned on Monday that interest rates were not likely to go down soon despite their efforts towards the same.
CBK Governor Professor Njuguna Ndungu blamed the situation on ‘structural rigidity’ and explained that structures of transmission between the banks and the population were inflexible making it difficult to pass the regulator’s benefits to the market.
“We have tried to resolve this by even making sure that banks lend to each other so that we overcome these rigidities,” Professor Ndungu said.
Last week the CBK Monetary Policy Committee reviewed the Central Bank Rate (CBR) downwards by 25 basis points to 7.75 percent, and lowered the cash ratio to 4.5 percent while supporting these decisions by reviewing the tenor or repo transactions by lengthening it to seven days.
Prof Ndungu however noted that despite the consistent reduction of the CBR from the fourth quarter of last year, general interest rates were yet to reflect this benefit.
“We are resolving this by trying to come up with controlled tenors of vertical and reverse repo.We want to make sure that the market does not arbitrate within the Central Bank before it gets out,” he said.
He explained that through such a move banks would be encouraged to look for customers from whom they could collect savings and deposits and lend out as opposed to borrowing from the bank.
On the other hand the Governor was quick to reassure that interest rates were likely to come down in the long term.
“We are proposing measures for the next two months (after which we will ) analyse how this economy has responded before deciding whether we will reduce or increase interest rates,” Prof Ndungu pointed out.
He however expressed optimism that if there is increased uptake by the private sector then the economy should experience better growth.
Prof Ndungu observed that the economy was on track to sustain the projected three percent growth, despite the current food insecurity and energy shortages.
He cited various efforts by the government to stimulate growth in the country which should increase spending while encouraging more borrowing by the private sector.
The Monetary Policy Committee, in its last meeting about five days ago, however observed a decline in commercial banks lending to the private sector in the second quarter whilst lending rates had risen by 22 basis points from 14.9 percent in March to 15.1 percent in June.
“Credit to the private sector expanded by merely 3.1 percent over the last three months compared with an 8.1 percent increase over the same period last year,” Prof Ndungu said and added: “Given this weak performance of the economy, the committee was uneasy with the outcome as it signaled that market liquidity was not being accessed by the private sector.”