NAIROBI Feb 3 (Reuters) – Activity in Kenya’s private sector increased modestly in January as banks curtailed new lending to firms in the wake of an interest rate cap imposed last September, a survey showed on Friday. The Markit Stanbic Bank Kenya Purchasing Managers Index (PMI) fell to 52.0 percent in January from 54.1 in the previous month, staying above the 50.0 line that divides growth from

contraction.

“Since the legislation to cap interest rates came into effect …we can now see signs of distress within the private sector as …(survey respondents) lament about cash shortages,”

said Jibran Qureishi, regional economist for East Africa at Stanbic Bank.

The government capped the lending rate for commercial banks at 400 basis points above the central bank rate, a measure economists said at the time risked hurting economic growth by

discouraging loans to smaller borrowers deemed more risky.

“A further slowdown in private sector credit growth and poor weather conditions will most likely lead to a downward trend in the PMI over the coming quarter,” Qureishi said. Private sector credit growth started falling at the end of 2015 after the central bank toughened supervision. It was

worsened last April when mid-sized lender Chase went into receivership.

The central bank said this week the drop in credit growth had bottomed out, with the year-on-year growth standing at 4.3 percent last December, close to the level of the previous two

months.

The survey found new orders for firms rose at a slower pace, while costs hit an eight month high.