NAIRBI, April 10 (Xinhua) -- The governor of Kenya's central bank said on Tuesday that interest rates are likely to drop further following a fall in the cost of living and expected stability of food prices because of the ongoing rains.
"Looking ahead, the numbers are good. Food inflation is expected to drop," Patrick Njoroge told a regional meeting on financial technology in Nairobi.
Njoroge said that inflation has gone to a manageable level of 4.5 percent; ongoing rains are expected to lead to lower cost of food, the key driver of inflation in Kenya.
He said Kenya reviewed its interest rates last month, when the Central Bank of Kenya lowered banks' lending rate to 9.5 percent from 10 percent.
Consumers are now borrowing at 13.5 percent, down from the previous 14 percent.
It was the first time the Monetary Policy Committee (MPC) changed the rates in nearly two years.
Kenyans expect further changes in the interest rates regime following announcements by Njoroge and Henry Rotich, the cabinet secretary for the National Treasury, that the country is about to review the law that capped the interest rates at 14 percent in 2016.
A study commissioned by the apex bank to find out the impact of interest rate caps noted that the move had compromised the independence of the Central Bank and complicated the conduct of monetary policy, making it produce perverse outcomes.
The report also noted that banks were turning away small borrowers because of an increase in declining loan accounts and more lending to government and large corporate firms.
"This has further seen a decline in credit to the private sector," the report noted.
Another review by Cytonn Investments said capping the interest rates while protecting the consumer from expensive credit resulted in more destructive results like locking out small businesses and other customers that banks classify as high risk from loans.
Cytonn also noted that the move was likely to lead to banks colluding so as to push up the yields on the treasury instruments.
"It is due to all the above factors that we believe this amendment will do more harm to the economy than good," the company noted in a review of the law.
