NAIROBI, KENYA, JAN 23 — The Central Bank of Kenya on Monday retained its base lending rate at 10 per cent, citing a stable macroeconomic environment and lower inflationary pressure.
CBKs’ top decision making organ —the Monetary Policy Committee said month-on-month overall inflation fell to 4.5 per cent in December 2017, from 4.7 per cent in November 2017, thereby remaining within the government target range.
The decline was due to lower food prices reflecting improved supply of key food items, particularly cabbages, Irish potatoes, tomatoes, sugar, and maize flour, the MPC noted.
According to the committee, the country has recorded sustained macroeconomic stability with increased optimism on the economic growth prospects and an improving business environment, on the backdrop of continued strengthening of the global economy.
“The decrease in food prices outweighed the increase in fuel and electricity prices and the rise in transport costs during the festive period. Non-food-non-fuel inflation remained below five per cent demonstrating that demand driven inflationary pressures remained muted,” CBK governor and chair of the MPC Patrick Njoroge said in a statement late Monday.
Although the rise in international oil prices is expected to exert moderate upward pressure, overall inflation is expected to remain well anchored and within the government target range in the near term, the committee said.
In the last quarter of 2017, the foreign exchange market remained relatively balanced supported by strong diaspora remittances, resilient tea and horticultural exports, and recovery in tourism.
The current account deficit is estimated at 6.2 per cent of GDP in 2017 and expected to narrow to 5.4 per cent of GDP in 2018, largely due to lower imports of food, lower imports in the second phase of the SGR project, steady growth in tea and horticulture exports, strong diaspora remittances, and continued growth in receipts from tourism.
The CBK foreign exchange reserves currently stand at $7.009 billion (about Ksh719.3 billion) (4.7 months of import cover).
These reserves, together with the precautionary arrangements with the IMF, equivalent to USD1.5 billion (about 153.9 billion), continue to provide an adequate buffer against short term shocks in the foreign exchange market, Njoroge noted.
The committee also alluded that private sector credit grew by 2.4 per cent in the 12 months to December 2017, slightly higher than the 2 per cent in October 2017.
“Analysis of this increase showed strong credit growth to manufacturing, domestic trade, and real estate sectors, which grew by 13.0 per cent, 10.5 per cent, and 8.6 per cent, respectively,” the MPC statement read in part.
The banking sector remains stable and resilient, according to the committee, with average commercial banks’ liquidity and capital adequacy ratios standing at 43.7 per cent and 18.5 per cent, respectively, as at December 2017.
The ratio of gross non-performing loans (NPLs) gross loans remained unchanged at 10.6 per cent between October and December 2017.
Preliminary data for 2017 showed good performance in the sector, notwithstanding an expected decline in profitability.
The sector’s return on assets and return on equity reduced to 2.7 per cent and 20.8 per cent, respectively, in 2017 from 3.2 per cent and 24.4 per cent in 2016.
The country’s economic growth averaged 4.7 per cent in the first three quarters of 2017 compared, to 5.7 per cent in a similar period in 2016. The services sector remained the main source of growth, particularly the Micro, Small and Medium Enterprises (MSMEs).
“The MPC therefore decided to retain the Central Bank Rate (CBR) at 10.0 percent,” Njoroge said.
The economy is expected to pick up strongly in 2018 supported by a stable macroeconomic environment, a resurgent private sector, recovery in agriculture, and sustained public investments in infrastructure.
Njoroge said the MPC continues to monitor the impact of the interest rate caps on the effective transmission of monetary policy.
“The CBK will continue to closely monitor developments in the global and domestic economy, and stands ready to take additional measures as necessary,” he said.