19 February 2019

East Africa: EAC Central Banks Hold Lending Rates Stable to Boost Growth

East Africa's central banks have voted to keep their policy lending rates low or unchanged to help bolster their economies, amid uncertainty and weaker global growth prospects.

Rwanda, Tanzania, Kenya and Uganda have maintained their benchmark lending rates to commercial banks at 5.5 per cent, seven per cent, nine per cent and 10 per cent respectively, to promote increased spending by firms and households and boost economic growth.

But Kenya, which has capped its interest rates, faces difficult task of unlocking credit to the private sector, after banks indicated that the capping legislation and their resultant inability to effectively price risk would continue stifling the supply of credit.

Kenya's Banking Survey for January 2019 released a week ago shows that lenders will continue channelling their funds to corporates and lower-risk investments in government securities.

Business sense

Central Bank Governor Patrick Njoroge said the rate cap has weakened the effectiveness of the Bank's monetary policy transmission mechanism and that it now takes longer for macroeconomic indicators such as inflation to respond to changes in the Central Bank Rate (CBR).

Kenya has set its lending rates at four percentage points above the CBR, and even though banks have been quick to adjust their lending rates in response to central bank's signal, they have refused to lend to households and small and medium-sized enterprises, whom they consider high risk borrowers.

Kenyan banks have argued that the capped interest rate, which now standards at 13 per cent, has not taken into account the risk element and that it makes business sense to lend to the government through Treasury bills and bonds than give money to high-risk borrowers.

Meanwhile, the returns on the 91-day, 182-day and 364-day Treasury bills stand at around seven per cent, 8.5 per cent and 9.6 per cent respectively.

The returns on two-year and 15-year Treasury bonds are estimated at 10.7 per cent and 12.85 per cent respectively, according to data from the Central Bank.

Last month, the bank retained its policy rate at 9 per cent after private sector credit growth slowed to 2.4 per cent last year from 3 per cent in 2017.

The other EAC member states operate a market-driven interest rate regime, allowing banks to adjust their lending rates in line with their respective central banks' policy rates.

The National Bank of Rwanda's Monetary Policy Committee, which convened on February 7, maintained the Central Bank Rate at 5.5 per cent to ensure economic stability and continued financing of the economy through increased lending to the private sector.

Governor John Rwangombwa said lending rates in Rwanda have decreased slightly to 16.96 per cent in 2018 from 17.17 per cent in 2017.

Rwanda is targeting an economic growth rate of 7.8 per cent this year, buoyed by increased private sector investments in the agricultural, industry and services sectors.

Private sector credit

The Bank of Uganda maintained the CBR at 10 per cent, with expectations that the economy would grow at 6.3 per cent in the 2018/19 fiscal year and remain on a steady growth path over the coming years, with output trending above potential.

Governor Prof Emmanuel Tumusiime-Mutebile said the projected strong economic growth would be supported by an accommodative interest rate policy decision.

"Although private sector credit growth has been on a recovery path since January 2018, it remains below its historical trend and its contribution to economic growth could be weighed down by relatively weak performance of foreign currency denominated loans," said Prof Tumusiime-Mutebile.

"There are risks to the projected economic growth momentum including weather-related constraints to agricultural production and challenges relating to the financing of public investment programmes," he added.

The Bank of Tanzania, on the other hand, lowered its benchmark lending rate to seven per cent from 9 per cent in August 2018, to boost economic growth by making credit affordable to the private sector.

The bank reduced the policy rate from 12 per cent to 9 per cent in August 2017.

The global economy is expected to contract to 3.6 per cent in 2019 from 3.8 per cent in 2018, largely due to increased uncertainties fuelled by the trade tensions between the US and China, Brexit negotiations, slowdown of the Chinese economy and the partial shutdown of the US government.

It is feared that these developments could lead to higher volatility in global financial markets.

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