The Star (Kenya) - - News Business -

he Mon­e­tary Pol­icy Com­mit­tee re­tained the Cen­tral Bank Rate at 10 per cent in its meet­ing held last week on Novem­ber 28. This is the sec­ond meet­ing since the cap­ping of in­ter­est rates that took ef­fect on Septem­ber 14. In ar­riv­ing at the de­ci­sion, the com­mit­tee cited mild in­fla­tion­ary pres­sures. In­fla­tion is also ex­pected to re­main within the govern­ment short­term tar­get range of be­tween 2.5 and 7.5 per cent. It also quoted the cur­rent un­cer­tain­ties in the lo­cal and global econ­omy.

No­tably, the com­mit­tee is of the view that the im­pact of the cap on in­ter­est rates on mon­e­tary pol­icy and the over­all econ­omy is in­con­clu­sive. This is be­cause avail­able data is not ad­e­quate to sup­port cred­i­ble anal­y­sis. This con­tin­ues to be a wait-and-see sit­u­a­tion.

In its pre­vi­ous meet­ing, barely one week af­ter the in­tro­duc­tion of the in­ter­est rates cap, the com­mit­tee low­ered the CBR rate from 10.5 to 10 per cent. This came as a shocker to the mar­ket that was yet to come to terms with a con­trolled credit mar­ket. At the time, the de­ci­sion of the com­mit­tee aimed at in­creas­ing credit to the pri­vate sec­tor. It also con­sid­ered de­mand pres­sure on in­fla­tion as mod­er­ate and in­fla­tion was ex­pected to de­cline.

The MPC has been tak­ing an more cen­tral role in the fi­nan­cial ser­vices sec­tor and the econ­omy than ever. Be­fore the rate cap, the change in both the di­rec­tion and mag­ni­tude of the CBR sig­nalled the mon­e­tary pol­icy stance. The de­ci­sion would then af­fect eco­nomic ac­tiv­ity and in­fla­tion through sev­eral chan­nels, which make up the transmission mech­a­nism of the mon­e­tary pol­icy. Af­ter the rate cap, the CBR plays a more di­rect role of set­ting the max­i­mum lend­ing rate and the min­i­mum de­posit rate. Credit is now priced at a max­i­mum of 4.0 per cent above the CBR and de­posit at a min­i­mum of 70 per cent. In a way, this makes the transmission mech­a­nism less ef­fec­tive be­cause it has to work within the con­fines of the cap. In fact, the Cen­tral Bank gover­nor is quoted as say­ing that the in­ter­est cap­ping would com­pli­cate mon­e­tary pol­icy.

To the fi­nan­cial sec­tor, it lim­its the price of risk which could mean high risk cus­tomers may be de­nied credit. In the re­cent meet­ing, the MPC noted that credit to the pri­vate sec­tor has sta­bilised, fol­low­ing a de­cline it its pre­vi­ous meet­ing. It also re­vealed that liq­uid­ity in the mar­ket had in­creased to 43.6 from 41.9 per cent. This means the banks are hold­ing more cash and near cash as­sets. How­ever, it is too early to be con­clu­sive this is a sign of credit re­stric­tion in re­sponse to the in­ter­est rate cap. But it is cer­tain that struc­tural changes are ex­pected as the fi­nan­cial in­dus­try ad­justs to the law.

The writer is a fi­nan­cial and risk con­sul­tant at First Tri­dent Cap­i­tal

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