In Summary

  • Treasury says it is too early to tell the impact of the interest rate cap law as there was already an underlying decline in credit to private sector.

Treasury Principal Secretary Kamau Thugge has downplayed the effect of rate caps in stifling private sector lending, arguing there was a steady decline in demand prior to the new law.

Dr Thugge reckons that ahead of the September 2016 controls, lending to private enterprises and mid-sized entrepreneurs by banks had already slowed down.

“Credit expansion to the private sector has been decelerating for some time. By the time the interest rate law came into effect, credit expansion was already low,” the PS said at a pre-budget briefing on Thursday.

“It is, therefore, too early to tell the impact of the interest rate cap law as there was already an underlying decline in credit to private sector.”

The Treasury says it is a paradox that the economy has registered sustained growth in the three quarters of 2016 — at 5.9 per cent GDP growth in Q1, 6.2 per cent in Q2 and 5.7 per cent in Q3 — yet banks have alleged a credit squeeze due to the caps.

The Banking (Amendment) Act 2016, sets the ceiling for lending rates at four percentage points above the benchmark rate and the floor for deposit rates at 70 per cent above the base rate.

The signal rate is currently at 10 per cent, meaning lending rates are capped at 14 per cent and deposit rate at seven per cent.

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