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Kenya Bankers Association (KBA) has urged the Central Bank of Kenya (CBK) to maintain the base lending rate at the current 8.75 per cent during the upcoming Monetary Policy Committee (MPC) meeting on February 6, 2024.

The lenders’ caucus says the recommendation is pegged on key macro-economic shifts, including the easing of inflation, increasing market interest rates, declining banking sector asset quality and a weakening Kenya Shilling.

“Easing inflationary pressure call for a hold on the CBR to allow its recent adjustments to be fully transmitted through the market and protect the fragile economic activity,” KBA said in a statement to the media.

Stablising inflation rate

The sector’s advocacy group observed that a decrease in inflationary pressure suggested a more stable economy, which could be supported by maintaining the current interest rate.

Inflation rate fell from 7.9 per cent in June 2023 to 6.6 per cent in December 2023 and 6.9 per cent in January, 2024.

Despite positive economic performance for the third quarter of 2023, however, the lobby anticipates a slowdown in economic performance due to a combination of domestic and global economic challenges, factors that further underscores the need for stability in the base lending rate.

According to KBA, an increase in market interest rates reflected the policy signal sent in the December 2023 MPC meeting when the CBR was increased by 200 basis points.

By keeping the base lending rate steady, the CBK can help ensure that banks continue to have access to affordable capital, supporting economic activity.

The lenders lobby was also concerned with the sector’s declining asset quality, that despite a robust credit growth, the industry’s Non-Performing Loan (NPL) ratio to gross loans had risen to 15.3 per cent in October 2023, up from 14.7 per cent in July 2023, noting that maintaining the current lending rate will help prevent further defaults and thereby strengthen the banking sector.

While external sector vulnerabilities continued to exert pressure on the exchange rate, causing it to weaken, KBA expects this pressure to ease, particularly with improved liquidity in the interbank foreign exchange market, a narrowing current account deficit, and the government’s commitment to settle the maturing Eurobond in June 2024.

“We argue for a maintenance of the current stance of monetary policy in keeping the CBR unchanged; allowing the 200 basis points upward adjustment effected in December 2023 to be fully transmitted in the market and protect the fragile economic activity,” KBA said.