Interest rates end year steady at 5.5%
Staff Writer | Wednesday December 14, 2016 13:29
In a statement released after the meeting, Bank of Bank (BoB) said it had concluded that the outlook for price stability remains positive, with the inflation forecast within the 3 – 6 percent objective range in the medium term.
“The current state of the economy and both the domestic and external economic outlook, including the inflation forecast, suggest that the prevailing monetary policy stance is consistent with maintaining inflation within the Bank’s medium-term objective range of 3 - 6 percent.
“In the circumstances, the Monetary Policy Committee decided to maintain the Bank Rate at 5.5%,” the central bank said.
In its bid to boost economic activity, the BoB has slashed the benchmark bank rate twice this year with the aim to make productive lending more affordable. Low inflationary pressures have also afforded the central bank the room to be accommodative with its monetary policy.
However, the low interest rate regime has not had a commensurate effect on credit uptake with both businesses and households conservative in taking up new loans. Despite four interest rates cuts in the past two years, the propensity of lower interest rate boosting credit growth has been greatly neutralised by limitations such as weak domestic demand, falling real wages, low business confidence and the prevailing higher risk aversion by banks. This could also be because of lower growth in employment and wages, which translates to weaker household purchasing power and ultimately weaker demand for goods and services. The prevailing weaker credit extension level also implies consumption induced by borrowing is limited thereby being less activity from the demand side.
Credit growth, which hovered between 15% and 25% in the years 2010-2014, have averaged below the 10% ballpark in the past two years although an improvement has been noticed this year attributable to faster growth in lending to both households and firms.
Weak demand prospects, pressures on household purchasing power and weak cyclical growth imply investment and credit growth are also expected to remain under pressure in the short-to medium-term. According to the central bank, subdued domestic demand pressures and benign foreign price developments contribute to the positive inflation outlook in the medium term.
“This outlook is subject to downside risks emanating from sluggish global economic activity and the resultant low commodity prices. It could, however, be adversely affected by any unanticipated large increase in administered prices and government levies as well as international oil and food prices beyond current forecasts,” added the bank.