NAIROBI, SEPTEMBER 25 ― The Central Bank of Kenya (CBK) has retained its base lending rate at nine per cent (9%), despite anticipated rise in overall inflation in the wake of the newly introduced Value Added Tax on petroleum products.
This means Kenyans will continue to borrow at the current rate which puts the commercial banks’ maximum lending rates at 13 per cent.
CBK’s top decision making organ-The Monetary Policy Committee on Tuesday said despite an expected rise in overall inflation in the near term, following the implementation of VAT on petroleum products in September 2018, its impact on other prices, as well as increases in international oil prices, it is expected to remain within the targeted government range.
This is due to lower food prices as a result of of favorable weather.
“The Committee noted that inflation expectations remained well anchored within the target range,” CBK governor Patrick Njoroge, who chairs the MPC, said in a statement Tuesday.
The meeting was held against a backdrop of macroeconomic stability, sustained optimism on the economic growth prospects, and increased uncertainties in the global financial markets.
Month-on-month overall inflation remained within the target range in July and August 2018, largely due to lower food prices.
“The inflation rate fell to 4.0 per cent in August from 4.4 percent in July, following decreases in food prices which offset the increase in energy prices, including the increase in the price of charcoal,” the MPC noted.
Nonfood-non-fuel (NFNF) inflation remained below five per cent, indicating that demand driven inflationary pressures remain muted.
According to the CBK, the country’s foreign exchange market remains stable supported by a continued narrowing in the current account deficit and balanced flows.
The current account deficit narrowed to 5.3 per cent in the 12 months to July from 5.6 per cent in June 2018.
It is expected to narrow to 5.4 per cent of GDP in 2018 from 6.7 per cent in 2017, with strong performance of agricultural exports particularly tea and horticulture, resilient diaspora remittances, and improved receipts from services particularly tourism.
Governor Njoroge however said the MPC will keenly monitor the second-round inflationary effects arising from the VAT on petroleum products, and any perverse response to its previous decisions.
“The MPC will continue to closely monitor developments in the global and domestic economy, and stands ready to take additional measures as necessary,” Njoroge said.
The latest review aligns to market predictions where industry players had expected the MPC to retain the rates at nine per cent.
Investment firm-Cytonn had predicted a nine per cent rate in Tuesday’s review based on a positive Gross Domestic Product (GDP) growth and low inflation rates in the recent times.
The MPC caught the market unaware during its previous meeting on July 30, when it lowered the CBK rates to nine per cent from 9.5 per cent.
During the meeting , the committee said economic growth prospects were improving and economic output was below its potential level, hence the need to keep the rates low.
On Tuesday, the MPC said lower imports of food compared with 2017 are expected to moderate the impact on the current account of a higher petroleum products import bill and the expected front-loading of imports with respect to the ongoing SGR project.
The CBK foreign exchange reserves, which currently stand at US$8.5 million (5.6 months of import cover) are expected to continue providing a buffer against short-term shocks in the foreign exchange market.
Private sector credit grew by 4.3 per cent in the 12 months to August 2018. Notably, credit to the manufacturing, building and construction, consumer durables, and trade sectors grew by 13.3 per cent, 14.9 per cent, 11.5 per cent, and 7.0 percent, respectively.
“Growth in private sector credit is expected to continue to pick up gradually,” Njoroge noted.
Average commercial banks’ liquidity and capital adequacy ratios stood at 48.4 per cent and 17.9 per cent, respectively in August.
The ratio of gross non-performing loans (NPLs) to gross loans rose to 12.7 per cent in August from 12.0 per cent in June 2018.
CBK has pegged half of the increase in NPLs to the Chase Bank (Kenya) Limited (In Receivership)-SBM (Kenya) Limited transaction.
“ Excluding this transaction, the NPL ratio rose marginally to 12.1 per cent in August from 12.0 per cent in June 2018,” it noted.
The balance of this increase in NPLs was mainly attributable to delayed payments from government and private sector.
