Other than the obvious effects of an interest rates cap on an economy, the government’s decision to introduce an interest rate ceiling has various effects on our investments. The impact of an interest rate ceiling has different effects on various members within our society. To some it is good news but to others, this may be bad news.
The Good News
Lower interest rates are good news for borrowers and people seeking to take up mortgages. It is expected that more and more people will take up loans to invest and improve their lives. However, it is also important to note that, since it is now cheaper to borrow money from local commercial banks, some banks will be more conservative and lend only to their more solid clients. Making it even harder for many borrowers to have access to these funds without a solid credit history.
The Bad News
Lower interest rates overall is bad news for savers as lower rates give smaller returns to savings. This is particularly so for retired members of our society who now will have to spend less as their disposable income has slightly declined. For investors, they will now opt to invest more in:
a. Assets as the lower interest rates will make it more attractive to do so (this will cause a rise in asset prices).
b. Offshore investment funds in countries such as US or Singapore to get a better rate of return on paper assets. This is because it will become less and less attractive to save money in Kenya due to low interest rates (this may in turn cause our shilling to depreciate over time).
Some of these effects may not be felt immediately due to the time lag in some assets such as the fixed interest rate assets in the market. Overall, I am hoping for the best with this decision to tame these banks who have for years given very low returns to depositors and charged really high rates to borrowers (my view however is purely from a ‘mwananchi’ point of view).
I hope the masses will gain from this, and the many investors who are were not so adventurous enough in the past, will now take a moment to explore what the market has to offer and seek out the numerous investment options which they are currently not taking advantage of.