Singapore – Kenya’s scrapping of a cap on banks’ lending rates has removed one of the concerns the central bank had about cutting interest rates, its governor said on Tuesday, adding that monetary policy direction was “clear”.
Kenya’s parliament agreed last week to ditch an interest rate limit that was introduced in 2016 to curb high borrowing costs.
The cap has since been blamed for choking business activity and economic growth.
Kenya’s Monetary Policy Committee (MPC), which is due to meet to set interest rates on Nov. 25, had previously, raised concerns that if it cut rates there could be a “perverse” reaction due to the commercial rate cap.
In his first public comments since the cap was repealed, Central Bank Governor, Patrick Njoroge, said the MPC had more “clarity” to make its monetary policy decisions.
His views are likely to bolster expectations for a rate cut later this month.
“The MPC had signalled that they see the potential for easing … monetary policy, in part, because the fiscal policy was being tightened,’’ Njoroge, who is also the Chairman of the MPC, told Reuters in Singapore, where he was attending a fintech conference.
“There was still the question about a perverse monetary reaction.
“Now that the repeal has come through, there isn’t any question anymore about the perverse reaction to monetary policy, so the direction is clear,’’
Njoroge added that the MPC’s decision, this month, would be based on many factors, including economic data.
Besides boosting credit flow to businesses, lifting the rate cap is also expected to help unlock a stand-by credit facility with the International Monetary Fund (IMF), after the expiry of a previous programme last year.
“They (IMF) did say this (rate cap) was something that was damaging the economy,’’ Njoroge said.
“We want to engage with the IMF and eventually conclude on an arrangement.
“This is the right time to insure ourselves.
“Before the house is burning, not when the house is burning.’’
Kenyan assets, including stocks and the shilling currency KES=, have rallied in recent weeks as it became clear the interest rate cap would be lifted.
The policy is expected to benefit local banks although there are concerns about a return to excessive borrowing costs.
KCB Group, Kenya’s biggest lender by assets, has said that the economic and business environment would no longer support very high-interest rates.