Banks want CBK to maintain base rate at 13%

Kenya Bankers Association now wants the Central Bank to hold the base-lending rate at 13 percent despite the easing of key economic indicators.

In a research note released on Thursday, the bankers cited the fragility of the shilling in the wake of emerging government financing risks especially after the rejection of the Finance Bill, poor credit scores by international rating firms, and low revenue collection. 

The bankers’ umbrella body argues that inflation is within the target range, and inflation expectations appear anchored in the short- to medium-term.

"Amidst stable inflation, resilience in economic growth performance, the fragility of the exchange rate in the wake of the emerging government financing risks calls for staying of the current tight monetary stance,'' KBA says.  

The government is also facing a huge funding challenge despite slashing the 2024/25 budget by over Sh100 billion after countrywide protests forced President William Ruto to do away with the Finance Bill, 2024 which was expected to bring in at least Sh346 billion. 

On Thursday, the Court of Appeal rendered the 2023/24 Finance Act unconstitutional, a move likely to further jeopardise the country's domestic revenue collection. 

This is on top of downgraded creditworthiness by international rating agencies and under subscription of local government papers, cutting the country's borrowing power. 

In the research note, the bankers acknowledged the benefits brought about by the high interest rate regime, including a drop in the cost of living, which has eased to 4.3 percent in July, the lowest since September 2020. 

Although the shilling has stabilised against major international currencies like the US dollar, trading at 130 units apiece compared to a high of 160 early this year, bankers have cautioned that a drop in base lending rate will dampen the momentum. 

In February, the apex bank CBK) raised borrowing costs to 13 percent, highs last seen nearly 12 years ago.

The prayers by bankers if granted will see the cost of obtaining credit in the country remain high, averaging 16.5 percent compared to 13.1 percent last year. 

KBA's request mirrors a recent statement by the International Monetary Fund (IMF) that warned central banks against a premature cut in their interest rates. 

According to IMF spokesperson Julie Kozack, although inflation levels have decreased in many economies, "it's not yet at target or near close enough to target."

"Our line, or our view remains the same, which is the job is not yet done on monetary policy. We are urging central banks to guard against premature monetary policy easing."

Even so, some financial analysts have opposed the views, stating that high rates are crippling economies. 

Jacinta Kimuyu of Bold Capitals is blaming the high interest rate regime on dropping credit to the private sector, standing at 6.6 percent in April 2024 compared to 7.9 percent in March.

"While the tight policy has had its gains, it has started to negate credit to the private sector which is the bloodline of the country's economy. The regulator must start cutting to stir growth, especially in the face of the prevailing political risk,'' she told the Star.

The CBK's monetary committee is expected to decide the new rate on August 6.