Yesterday, Monday 27th March, 2017 the Monetary Policy Committee (MPC) met to review the outcome of its previous policy decisions and recent economic developments. The MPC therefore decided to retain the Central Bank Rate (CBR) at 10.0 percent in order to anchor inflation expectations.
Hope you remember that the Banking (Amendment) Act 2016 sets the ceiling for lending rate at 4 percentage points above the base rate. It also goes ahead to set the floor for deposit rates at 70 percent above the base rate. This effectively caps lending rates at 14 percent while your deposits will earn a minimum of 7 percent in interest rate.
Overall inflation is expected to remain outside the Government target range of between 2.5 percent and 7 percent in the near term due to the elevated food prices, even as demand pressures remain subdued. The meeting was held against a backdrop of a sharp increase in food prices due to the prevailing drought in some parts of the country, the continued depressed growth of private sector credit, and uncertainties in the global economy.
The Committee remains concerned about the prevailing uncertainties, including the impact of the interest rate caps on the effectiveness of monetary policy. As such, the Committee will continue to closely monitor developments in the domestic and global economies, and stands ready to take additional measures as necessary.
The MPC reviewed preliminary analyses of the impact of the Banking (Amendment) Act 2016 that was implemented in September 2016. While the growth of private sector credit has stabilized at 4 percent, the share of loans to corporates has increased relative to business and personal loans. The average maturity of loans has also shifted to short term lending. The number of loan applications increased between September and December 2016, but has stabilized to February 2017.
However, loan approvals declined by 6 percent between December 2016 and February 2017. Lending to Micro, Small, and Medium Enterprises (MSMEs) has declined in value terms, reflected in reduced lending by large and medium banks. A survey of commercial bank credit officers indicates that their expectations are that while demand for credit would increase with the interest rate caps, actual credit granted would remain constant as a result of tighter credit standards. While these are the early indications of the impact of the interest rate caps, banks are still adjusting their business models to ensure that they remain competitive in the new environment.
The CBK’s foreign exchange reserves currently stand at $7.762 billion (equivalent to 5.1 months of import cover) compared to $6.963 billion (equivalent to 4.6 months of import cover) at the end of January 2017. The increase is largely due to inflows of planned external loans of the Government. These reserves, together with the Precautionary Arrangements with the International Monetary Fund (IMF), equivalent to $1.5 billion, continue to provide an adequate buffer against short-term shocks.
The banking sector remains resilient. Average commercial banks’ liquidity and capital adequacy ratios stood at 43.2 percent and 19.7 percent respectively in February 2017. However, the ratio of gross non-performing loans to gross loans increased to 9.7 percent in February 2017, largely due to tighter credit standards and slower credit growth.
The Committee noted that the slowdown in credit growth largely reflected sector developments in trade, manufacturing, real estate, and private households, which account for 60 percent of total credit to the private sector. The contribution of these sectors to total credit growth declined gradually to 4.6 percentage points in February 2017, from 13.6 percentage points in July 2015. This was partly due to
- A slowdown in exports by the manufacturing sector
- Delays in registration of land titles and building approvals
- Availability of alternative external financing for key private sector projects