Kenya Holds Key Rate as Policy Bind Persists on Rate-Cap Law

(Bloomberg) -- Kenya’s central bank left its key rate unchanged for a seventh straight meeting as a protracted election period weighs on growth and a law capping borrowing charges impedes policy making.

The Monetary Policy Committee retained the rate at 10 percent, Governor Patrick Njoroge said Thursday, in line with six economists’ estimates in a Bloomberg survey.

“The committee concluded that inflationary pressures in the economy were muted, and inflation was expected to continue to decline in the short term,” Njoroge said in a statement emailed from the capital, Nairobi. The Central Bank of Kenya, which last cut the rate in 2016, targets inflation in a 2.5 percent to 7.5 percent range.

Inflation slowed to a 17-month low of 5.7 percent in October on falling food prices and subdued consumer demand. Growth in East Africa’s biggest economy has slowed this year as the annulment of the country’s presidential election stymied investment and farm output contracted for the first time in eight years because of a drought. The Treasury this month cut its 2017 growth forecast to 5 percent from 5.9 percent.

While the environment is ripe for a rate cut, a law limiting how much commercial lenders can charge for loans “adds a layer of complexity” to monetary policy decisions, said Jacques Nel, senior economist at Paarl, South Africa-based NKC African Economics.

Scrapping Law

Njoroge “fears” reducing rates could lock more borrowers out of the credit market, Nel said in emailed responses to questions. “If the regulation is scrapped sometime during the first half of 2018, the central bank is expected to continue the easing cycle.”

Kenya slapped banks with a law limiting loan charges to 400 basis points above the benchmark rate last year, exacerbating a slowdown in credit growth. Lending to individuals and businesses grew 1.6 percent in August, compared with 5.9 percent a year ago, according to the central bank.

Banks have resorted to lending only to their best clients to cut risk, according to Razia Khan, chief economist for Africa at Standard Chartered Bank. Njoroge may cut rates by a 100 basis points between March and May if the law is amended, she said.

“In normal circumstances, the central bank would be easing rates comfortably, providing a much-needed boost to the economy,” Khan said in an emailed note. “A cut could conceivably weaken credit growth further.”

To contact the reporter on this story: Felix Njini in Nairobi at fnjini@bloomberg.net.

To contact the editors responsible for this story: Rene Vollgraaff at rvollgraaff@bloomberg.net, Helen Nyambura, Paul Richardson

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