NAIROBI, MAY 28 — The Central Bank of Kenya has retained the base lending rate at 9.50 per cent in its latest review, allowing Kenyans to continue accessing commercial bank loans at the lowest rate the market has ever had in recent times.
The Bank’s top decision making organ met on Monday as the country continues to record sustainable macroeconomic stability after last years’ general elections and prolonged drought that ended with the onset of rains.
The MPC, chaired by CBK governor Patrick Njoroge, noted that inflation expectations were well anchored within the Government target range while economic output was below its potential level, hence there was some room for accommodative monetary policy.
The Committee also assessed that the policy action at its March meeting (which reduced the Central Bank Rate by 50 basis points from 10 per cent) was yet to be fully transmitted to the economy, including a determination of any perverse outcomes.
Month-on-month overall inflation fell to 3.7 per cent in April 2018 from 4.2 per cent in March 2018 largely due to lower food prices particularly for Irish potatoes, cabbages, and sugar, the committee noted.
The decrease in food prices outweighed the increases in energy prices.
“Non-food-non-fuel inflation rose slightly, but remained below five per cent indicating that demand driven inflationary pressures are muted,” the committee said.
Despite rising international oil prices and the impact on domestic fuel prices expected to continue exerting moderate upward pressure on inflation, overall inflation is expected to remain within the Government target range mainly due to the expected further decline in food prices following improved weather conditions.
Other factors that influenced the decision include the domestic foreign exchange market which it said remains stable supported by a narrowing in the current account deficit, to 6.1 per cent of GDP in the 12 months to March 2018, from 6.7 per cent in 2017.
This is expected to narrow further to 5.4 per cent of GDP in 2018, supported by stronger growth in agricultural exports, higher diaspora remittances and tourism receipts.
“ Lower imports of food and SGR-related equipment in 2018 are expected to moderate the impact of higher international oil prices on the petroleum products import bill,” the MPC noted.
The CBK foreign exchange reserves remain at all-time highs. Currently, they stand at US$9.05 billion (6.1 months of import cover) and continue to provide an adequate buffer against short-term shocks in the foreign exchange market.
The precautionary arrangement with the International Monetary Fund equivalent to US$989.8 million, will provide an additional buffer against exogenous shocks, the regulator said.
Private sector credit grew by 2.8 per cent in the 12 months to April 2018, slightly higher than 2.1 per cent in February 2018.
In particular, lending to the manufacturing, building and construction, finance and insurance, and trade sectors grew by 10.1 per cent, 14.1 per cent, 10.1 per cent, and 5.0 percent, respectively.
This offset the substantial loan repayments recorded in the transport and communication sector in the first quarter of 2018.
The MPC also noted that the banking sector remains stable and resilient. Average commercial banks’ liquidity and capital adequacy ratios stood at 47.2 per cent and 17.9 per cent, respectively, in April 2018.
“The Committee therefore decided to retain the CBR at 9.50 percent,” the MPC said in a statement.
The MPC Private Sector Market Perception Survey conducted in May 2018 showed that inflation was expected to decline in the near term on account of lower food prices.
The Survey revealed sustained optimism for stronger growth in 2018 and improved business environment.
Respondents attributed this optimism to, among others, a stable macroeconomic environment, favourable weather conditions, continued public spending on infrastructure, focus by the Government on the Big 4 priority areas, and the expected direct flights to the U.S.A
Global growth is also expected to continue strengthening in 2018, but uncertainties remain particularly with regard to the U.S. economic and trade policies, rising international oil prices, and the pace of monetary policy normalization in advanced economies.
These conditions have led to the return of volatility in the global financial markets, particularly in the emerging market economies.
“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 country’s interest rate capping law which came into force on September 14, 2016 fixes lending rates at four percentage points above the CBR.
This puts the lending rate ceiling by commercial banks at 13.5 per cent.