Bankers have called on the Central Bank of Kenya (CBK) to reduce interest rates at its year-end Monetary Policy Committee (MPC) meeting on December 5, 2024.
The Kenya Bankers Association (KBA), a business lobby group, believes that further rate cuts will send a strong signal to the economy that inflation rates will fall.
With inflation firmly set at a low target in the medium term and exchange rates stable, the lobby group believes that effective rate cuts and a recovery in private sector credit growth will boost the economy.
Bank lending to the private sector fell to 0.4% in September and approached zero in October as borrowing costs rose due to higher interest rates.
“There is scope for the Central Bank of Kenya to augment interest rates to reverse the declines in the private sector credit growth and support economic activity,” KBA remarked in a research note.
As the non-performing loan ratio of private credit rose to 16.5%, commercial banks preferred to invest in low-value assets such as government bonds.
Based on these developments and the need to reverse the decline in private sector credit growth, we recommend that the central bank make further cuts to send a strong signal to the economy about lower borrowing costs.
In August, the central bank implemented its first monetary policy in a year, cutting interest rates by 25 basis points and then by 75 basis points, bringing the price ratio to 12.00%. Despite the 1 percentage point rate cut, commercial banks generally did not reduce their lending rates, with more than half of banks increasing their interest rates for October.
The latest data from the Kenya Bureau of Statistics (KNBS) showed that inflation slowed from 2.7% in October to 2.8% in November due to higher food prices.
As the non-performing loan ratio of private credit rose to 16.5%, commercial banks preferred to invest in low-value assets such as government bonds.
The Fed’s recent two interest rate cuts of 0.75%, targeting between 4.50% and 4.75%, marked the beginning of a shift since the session spread around the world.
The European Central Bank has cut interest rates from 0.25% to 3.25%, its third rate cut of 2024, as inflation fell below its 2% target and growth in the eurozone weakened overall.
Central banks in Europe, the UK, Canada and some emerging economies, including Kenya, have begun cutting interest rates in the months leading up to the Fed meeting. While the Fed is not the architect of the easy cycle, it still plays an important role in establishing it.
