Kenya’s Central Bank (CBK) lowered the base lending rate to 9.50% from 11% on Thursday, but warned it would continue to monitor key trends in the economy to ensure price stability, signaling the banks to lower interest rates further.
Commercial banks have mostly stuck to higher lending rates at 19% despite the CBK easing of the monetary policy rates following the easing of annual inflation, with non-food inflation within the government’s annual target of 5%.
CBK Governor Njuguna Ndung’u said after chairing a Monetary Committee Meeting, there was a positive outlook on the economy including stability in both the product and foreign exchange markets reflected in stable inflation and the exchange rate.
“In order to enhance the monetary policy stance and its outcomes as well as increase the uptake of private sector credit and re-align interest rates in the economy, the Committee decided to lower the CBR by 150 basis points,” the Governor said.
The Bank last set the Rate at its November 2012 Meeting. Since then, declining inflation and exchange rate stability were recorded as key targets.
Overall month-on-month inflation declined from 3.25% in November 2012 to 3.20% in December 2012, reflecting a continued decline in food prices and easing demand pressure in the economy.
The exchange rate has remained stable since the last meeting, fluctuating within a range of Ksh.85.38 to Ksh.86.61 against the US Dollar.
CBK foreign exchange reserves increased during the period providing a cushion to the foreign exchange market against both external and domestic shocks.
The level of usable foreign exchange reserves held by the CBK increased from US$5. 2 billion (4.14 months of import cover) at the beginning of November, 2012 to US$5.37 billion (4.15 months of import cover) at the beginning of January 2013.
The top monetary policy Committee warned the main risks to macroeconomic stability were the uncertainty over the full resolution of the eurozone problems and balance of payments pressures attributed to the high current account deficit.
“The outlook indicates a higher growth path and improvement in the current account deficit over the medium-term thereby indicating that there will be a continuation of the current exchange rate stability,” the CBK said.
The Committee also noted that credit risk in the banking sector remained low; the ratio of gross non-performing loans to total loans declined from 4.7% in October 2012 to 4.6% in November 2012.
Kenya’s economy registered a notable recovery in the third quarter of 2012 following improved stability and robust agricultural sector performance due to improved rains.
Economic growth in the quarter was 4.7 per cent up from 3.4 per cent and 3.3 per cent in the first and second quarters, respectively.
Meanwhile, the CBK has noted confidence in the economy remains high. The Standard and Poor’s rating agency affirmed Kenya’s rating at B+ with a stable outlook while Moody’s assigned a B1 rating with a stable outlook.
The Nairobi Securities Exchange (NSE-20 index) rose from 4,083.5 in November 2012 to 4,133.0 in December 2012 following increased participation by foreign investors.