Will interest rates drop equate to credit growth? Analysts weigh-in

March 20, 2018
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This is according to analysts at Nabo Capital who assert that the move is timely, considering inflation is expected to remain within the target range of 2.5 per cent – 7.5 per cent in the short-term/FILE

, NAIROBI, Kenya, Mar 20 – The Central Bank of Kenya’s decision to lower the Central Bank Rate (CBR) did not come as a surprise.

This is according to analysts at Nabo Capital who assert that the move is timely, considering inflation is expected to remain within the target range of 2.5 per cent – 7.5 per cent in the short-term.

The remarks come a day after CBK Monetary Policy Committee (MPC) meeting adopted an accommodative stance, reducing the benchmark rate by 50 basis points to 9.50 per cent, the first rate cut in nine sessions.

Senior Investment Associate at Nabo Capital Cliff Bakashaba says that the decision is coupled with a positive outlook on currency stability given foreign reserves stand at 5.9 months of import cover which gives CBK room for monetary easing.

“The elephant in the room, however, is the impact the decision will have on the credit cycle. Lower interest rates are supposed to spur demand for credit but due to the law capping interest rates, banks are shying away from lending to the category of borrowers that they consider high risk,” Bakashaba said.

The Investment firm adds that cutting the CBR means banks will lend at 13.5 per cent which is likely to deny more borrowers access to credit.

“Policymakers will have to consider the impact the law has had on credit growth. An amendment or a reversal of the law could be imminent.”

Across town, analysts at Genghis Capital are of the view that the rate cut decision signals optimism that the rate cap may be reviewed or repealed in the near-term horizon.

They add that MPC decision is probably aimed to narrow the prevalent economic output gap, where there’s been an increased economic growth optimism as indicated by; the March 2018 MPC Private Sector Market Perception Survey and also the rising Purchasing Managers Index (PMI) which hit a 22-month high of 54.7 in February.

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