NAIROBI, KENYA, NOVEMBER 27 — The Central Bank of Kenya (CBK) has held its benchmark lending rate at 9.0 per cent for the second time, leaving the low rate to prevail into its fifth month and closure of the year.
CBK’s top decision making organ- Monetary Policy Committee (MPC) which met on Tuesday (November 27), pegged its decision on stable inflation and positive macroeconomics in the country.
The meeting was held against a backdrop of macroeconomic stability, increased optimism on the economic growth prospects, and heightened uncertainties in the global financial markets.
MPC reported month-on-month overall inflation remained within the target range in September and October, largely due to lower food prices and muted demand-driven inflationary pressures.
The inflation rate fell to 5.5 percent in October from 5.7 percent in September, following decreases in food prices which offset the increase in energy prices and transport costs following the implementation of VAT on petroleum products in September 2018.
Nonfood-non-fuel inflation remained below five per cent, indicating that there were no demand pressures in the economy.
“Looking forward, overall inflation is expected to remain within the target range in the near term, mainly due to expected lower food prices reflecting favorable weather conditions, the decline in international oil prices, and the recent downward revision in electricity tariffs,” the committee chaired by CBK governor Patrick Njoroge said in a statement.
“The MPC concluded that the current policy stance remains appropriate, and will continue to monitor any perverse response to its previous decisions. The Committee therefore decided to retain the CBR at 9.00 percent,” it said.
Njoroge said the MPC will however continue to closely monitor developments in the global and domestic economy and stands, ready to take additional measures as necessary.
The retained rates fall within earlier predictions by asset managers at Cytonn Asset Managers Limited, an Affiliate of Cytonn Investments Management Plc.
The managers had last week predicted the base lending rate will be retained at 9.0%, based on among others; stable inflation, strong currency and low credit to the private sector.Why Kenya’s Central Bank is likely to retain base lending rate at 9%
In its review on Tuesday, the MPC noted that the recent excise tax adjustment on voice calls and internet services is expected to have a marginal impact on inflation.
The foreign exchange market has remained balanced supported by a narrowing in the current account deficit to 5.3 per cent in the 12 months to September 2018 compared to 6.5 percent in September 2017, CBK added.
The narrowing of the current account deficit is largely due to increased exports of tea and horticulture, increased diaspora remittances, strong receipts from tourism, and lower imports of food and SGR-related equipment relative to 2017.
It is expected to narrow further to 5.2 per cent of GDP in 2018 from 6.3 per cent in 2017. The CBK foreign exchange reserves, which currently stand at US$8.03 billion (5.3 months of import cover) continue to provide adequate cover, and a buffer against short-term shocks in the foreign exchange market.
Private sector credit grew by 4.4 per cent in the 12 months to October 2018, compared to 3.9 percent in September, driven by strong growth the manufacturing, business services, finance and insurance, and building and construction, which grew by 14.9 per cent, 12.4 per cent, 9.1 per cent and 7.2 per cent, respectively.
Growth in private sector credit is expected to pick up gradually with the continued expansion of the economy.
The banking sector is reported to remain stable and resilient. Average commercial banks’ liquidity and capital adequacy ratios increased to 48.9 per cent and 18.4 per cent, respectively, in October 2018.
The ratio of gross non-performing loans (NPLs) to gross loans fell to 12.3 per cent in October 2018 from 12.7 per cent in August, largely due to declines in NPLs in the trade, and personal and household sectors.
The declines were mainly due to sustained recovery efforts by banks.
Data for the second quarter of 2018 showed a strong pickup of the economy, with real GDP growth averaging 6.0 per cent in the first half of 2018 compared to 4.7 per cent in the first half of 2017.
“This outcome was due to a strong recovery in agricultural activity due to improved weather conditions, continued recovery of the manufacturing sector, and resilient performance of the services sector particularly trade, tourism, information and communication, transport, and real estate,” Governor Njoroge said.
Overall growth in 2018 is expected to be strong, supported by recovery in agricultural production, alignment of Government spending to the Big 4 priority sectors, a stable macroeconomic environment, an improved business environment, and a favorable external environment.
The MPC Private Sector Market Perception Survey conducted in November indicated that inflation expectations were well anchored within the target range in the near term on account of lower food prices and reduction in electricity prices.
The Survey revealed increased optimism for stronger overall growth in 2018. Respondents attributed this optimism to, among other factors, improved agricultural production, continued infrastructure development, an improvement in the business environment, focus by the Government on the Big 4 priority sectors, a stable macroeconomic environment and the expected increase in trade and tourist arrivals following the commencement of direct flights to the United States.
However, the optimism was tempered by sluggish private sector credit growth, concerns over delayed government spending, and the recent increase in fuel prices.
Although global growth has continued to strengthen in 2018, the risks have increased particularly with regard to the escalating trade tensions, pace of normalization of monetary policy in the advanced economies, and divergence in the monetary policy stances between the developed and emerging market economies.
The volatility in the global financial markets and change in investor sentiment could lead to further turbulence in emerging market economies.
An updated assessment of the impact of interest rate caps showed that the caps had weakened the effectiveness of monetary policy transmission, with further evidence of perverse outcomes.
In particular, the transmission of changes in the CBR to growth and inflation takes longer compared to the period before caps.
The Committee however noted that inflation expectations remained well anchored within the target range, and that the economy was operating close to its potential.
The latest developments hence means Kenyan’s will continue borrowing at a maximum interest rate of 13 per cent as the rate cap law limits borrowing rates to 4 percentage above the Central Bank Rate.
