Ceiling whacks

WHEN interest rates are uncomfortably high, what can be done? To Western central bankers struggling with overflowing liquidity, that would be a pleasant question to have to answer. In Kenya, where the central bank’s headline rate is 10.5%, it is a nagging political problem. On September 14th a law capping the interest rates that commercial banks can charge at four points above the central-bank rate is due to come into force. Under the same law, banks will have to pay depositors at least 70% of the central-bank rate. Bankers and the IMF are horrified. What effect will the cap have?

MPs had already tried twice before to cap rates. On both occasions the law they put forward foundered on a presidential veto. The current president, Uhuru Kenyatta, signed the law despite the objections of the central bank and most of the banking industry. Kenya is holding a presidential election next year, and access to finance has become a hot political issue. According to Aly Khan Satchu, a well-connected Kenyan financier, Mr Kenyatta felt too weak to resist. Pundits rejoiced. “Cheaper loans at last,” declared the Standard; “Why low bank rates are good for your…Continue reading

This post was originally published in the Economist.

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Ceiling whacks

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