Kenya enters new normal with rate cut

PUBLISHED: Tue, 20 Sep 2016 15:17:59 GMT

NAIROBI, Sept 20 (Reuters) – Kenya’s central bank unexpectedly cut its benchmark interest rate by 50 basis points on Tuesday, moving to try to spur credit growth just a week after commercial banks’ lending rates were capped by law.

— bonney tunya (@BonneyTunya) September 20, 2016

The Bank’s monetary policy committee (MPC) said economic conditions supported the reduction, to 10.0 percent, noting inflation was within the government’s preferred band of 2.5-7.5 percent and the local shilling was stable while hard currency reserves had jumped.

“The committee remains concerned about the persistent slowdown in private sector credit growth,” it said in a statement.

The bill capping commercial loan rates at 400 basis points above the benchmark rate, strongly opposed by banks which said it would eat into their margins, was signed into law on Aug. 24, sending lenders’ shares sharply lower.

It came into effect in mid-September, and all 12 economists and analysts polled by Reuters forecast the central bank would hold rates on Tuesday to give the law time to take effect.

Razia Khan, head of research for Africa at Standard Chartered in London, said the cut might benefit borrowers with existing loans, but could further dampen commercial lending.

“Banks are likely to cut back on new lending in response to the inability to price for risk,” she said.

The MPC, which did not provide private sector credit growth data, said an expected narrowing of the current account deficit to 5.5 percent of GDP this year from 6.8 percent in 2015 also supported the cut.

The central bank had cut rates by 100 basis points in May.

The government expects the economy to grow by 6 percent this year, up from 5.6 percent last year.

Meanwhile Rwanda’s economy grew by 5.4 percent in the second quarter of this year, the statistics office said on Tuesday. 

(Reporting by Duncan Miriri; Editing by Alison Williams)

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