The Central Bank of Kenya’s Monetary Policy Committee has cut interest rates by 25 basis points, to 8.25 percent, making it the second time the rate has dropped since the repeal of the interest rate cap.
CBK governor Patrick Njoroge, in a statement on January 27, stated that the economy was performing way below its potential level.
He further revealed that November 2019’s decision to lower the interest rate from 9% to 8.5% had a positive effect on the economy.
While this may be a welcome move in catalyzing demand through affordable credit, how effectively this decision cascades to the common mwananchi is what picks the interest of most Kenyans.
Speaking , Kavata Kiaro, a finance expert, explained that although commercial banks could now afford to borrow from the central bank at a lower rate, it was at their discretion to decide whether to replicate the lower rate to borrowers.
“Prior to the repeal of section 33b of the Banking Act that provided for the capping of bank interest rates, banks could add 4% to the prevailing Central Bank Rate (CBR),” she clarified.
“However, following the repeal, the banks have the freedom to choose how much more to charge. So, the question of whether the new rate will have a positive impact is dependent on such factors,” she further pointed out.
On November 7, 2019, President Uhuru Kenyatta signed into law the Finance Bill 2019, which repealed the capping of bank rates, with experts going on to predict that the move would enhance access to credit by the private sector as well as cut out exploitative shylocks and other unregulated lenders.
This seems to have been the effect as Njoroge, in his latest press release, revealed that the private sector had experienced significant growth.
“Private sector credit grew by 7.1% in the 12 months to December 2019. This was observed in the following sectors: manufacturing (9.2%), trade (8.9%), transport and communication (8.1%), and consumer durables (26.0),” read an excerpt from the statement.