January 23, 2018 / 12:40 PM / 8 months ago

UPDATE 2-Kenya central bank sees faster growth in 2018 despite rate cap "brake"

(Adds details, quotes)

By George Obulutsa

NAIROBI, Jan 23 (Reuters) - Kenya’s central bank governor said on Tuesday the country’s interest rate cap was holding back the economy, but the bank still forecast that growth would speed up to 6.2 per cent in 2018 from around 5 percent last year.

With a supportive fiscal policy, Governor Patrick Njoroge said, the forecast could go higher.

The National Treasury said the fiscal deficit was likely to fall to 6 percent of gross domestic product in 2018/19 (July-June) from 7.2 percent in 2017/18.

“That is obviously something that would be positive,” Njoroge told a news conference.

Tourism could also help, after direct flights between Kenya and the United States begin later this year. A decrease in the transport cost of exports through use of a new standard- gauge railway also might boost growth.

“All those were not really fully incorporated in the number that I talked about, the 6.2 (percent),” he said.

The government adopted a cap on commercial lending rates in September 2016, setting it at 4 percentage points above the central bank’s benchmark rate, to limit the cost of borrowing from commercial banks. It said lenders had failed to pass on the benefits of growth in the industry to consumers.

The central bank had previously questioned the measure, saying it had made predicting the impact of monetary policy difficult.

“The interest rate caps have been acting as a brake to the economy. I don’t know if any of you have ever driven around with your brake still on. Eventually, something breaks,” Njoroge said.

“The economy is being held back by this. And that is another set of issues we will bring to the fore and deal with so as to support, rather than inhibit economic dynamism in the economy.”

Last year, the lawmaker who pushed for the rate cap said the national assembly would throw out any bill aimed at altering it.

A prolonged election cycle last year cut growth by nearly 1 percent from the initial forecast, trimming it to an estimated 4.8 percent.

Njoroge said agriculture was a drag on the economy last year as coped with the effects of drought. Farming accounts for 30 percent of output, and it expanded by 4.4 per cent in 2016. (Editing by Duncan Miriri, Larry King)

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