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Why Central Bank could cut base lending rate to 7.25pc

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The Monetary Policy Committee (MPC) is set to meet today, 23rd March 2020 to review the outcome of its previous policy decisions and recent economic developments.

Similar to the actions of other Central Banks, it is widely expected that the MPC will maintain the status quo and reduce the Central Bank Rate (CBR) by up to 100 basis points to 7.25% from 8.25% in a bid to boost the economy amid the uncertainty and supply chain shortages caused by the Coronavirus.

It is however, not expected that this move will be passed on to bank rates. The enactment of the Banking (Amendment) Act 2015 in September 2016, introducing interest rate controls, reduced the effectiveness of the monetary policy and made it difficult for the CBK to adjust the monetary policy rates in response to economic developments.

Following the repeal of Section 33B of the Banking Act, the implementation of expansionary monetary policy continues to be difficult because with the tough and uncertain economic environment, banks find it even more difficult to price for risk at lower interest rates. In such an event, banks will also not increase their deposit rates.

On this premise, it is also believed that a big part of the solution to broken supply chains, and the sharp fall in demand in industries acutely affected by the virus, is fiscal, and as such monetary policy might not be effective in injecting the requisite liquidity to the economy, owing to the fact that Banks are expected to take a cautious stance in lending due to the heightened likelihood of defaults and as such we do not foresee a decline in lending interest rates, and also do not expect an increase in deposit rates at banks.

Consequently, this is the main reason that has driven the Kenyan Government to take a rather unconventional type of quantitative easing by transferring Ksh 7.4billion obtained from the demonetization exercise of the older series Ksh 1,000 notes from its General Reserve Fund to the Government Consolidated Fund in a bid to inject new money into the money supply.

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