Central Bank of Kenya’s (CBK) Monetary Policy Committee (MPC) Tuesday meets for the first time in the shadow of a controlled interest rate regime that some say will impede its ability to make decisions.
The banking sector regulator last operated in such an environment in July 1991, just four months before Kenya reverted to a multi-party political system.
While some believe that the MPC will be constrained, others aver that it should still be able to effectively exercise its mandate but is likely to wait and see the impact of the new law before taking any bold decisions on the base lending rate.
Some analysts, including the International Monetary Fund (IMF), have argued that the independence of the central bank and the effectiveness of monetary policy transmission is likely to be compromised by a controlled regime since it has to take into account the political preferences.
In an analysis, Citi Global Markets investment bankers say that it will become difficult for the central bank to transmit the monetary policy through the financial system which effectively means that whatever decision the MPC makes, it may not necessarily affect inflation, the exchange rate or interest rates although it will by law automatically set the lending rate.
“While appreciating the underlying sentiments about the need to lower the overall cost of credit, we continue to express concern on the adverse consequences of capping interest rates.
“These would include inefficiencies in the credit market and undermining the effectiveness of monetary policy transmission,” said Citi Global Markets.
The Citi analysts said the Kenyan situation called for a change in banking models because the extent of the rate cap was more draconian than in other countries where such restrictions have been put in place.
Stephen Ngunje, a fixed-income trader at Nairobi-based AIB Capital, said the MPC would have to consider that the new law is yet to settle and therefore the best thing would be to hold the Central Bank Rate (CBR) where it currently is.
The CBR is currently at 10.5 per cent, having been left at that level on July 25, even though the Kenya Banks Reference Rate (KBRR) was lowered to 8.9 per cent.
This was exactly a month before President Uhuru Kenyatta signed the law capping lending rates and imposing a floor on deposit rates.
“The MPC should hold the base lending rate at the same level until they see how the market reacts.
“Right now there are many dynamics at play, so the MPC should wait until things settle,” said Mr Ngunje.
Cytonn Investments said the controls will make transmitting the signals from the MPC rather inefficient. The analysts said the increase in the prevalence of shadow banking will likely impede that transmission.
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Credit: Business Daily