Nairobi, Kenya:
Central Bank of Kenya (CBK) yesterday gashed the benchmark lending rate by 350 basis points to 13.0 percent from the previous 16.5 percent to allow more borrowing from local banks, a step accredited to plummeted inflation rate.
The CBK’s Monetary Policy Committee (MPC) which met on Wednesday to review market developments and evaluate the outcomes of its monetary policy stance cited the falling inflation, stable currency and a strong banking sector as some of the factors that contributed to the reduction of the Central Bank Rate (CBR).
“Short-term interest rates remained generally stable following the downward adjustment of the CBR during the last MPC meeting. In addition, sustained Open Market Operations have ensured effective liquidity management and orderly behavior in the interbank market, “MPC said in a statement.
The committee also recognized that there remain risks to those elements relevant to monetary policy in maintaining macroeconomic stability. These, it said, include vulnerability to international oil prices and any likely impact of drought affecting world food prices.
“The slowdown in global economic growth was also noted to have a dampening effect on both domestic growth and the balance of payments. Going forward, the CBK will continue to monitor these risks and take appropriate actions,” MPC said.
The East African nation’s overall inflation declined in August to 6.09 percent and was within the upper band of 7.5 percent set by the government for the fiscal year 2012/13.
“All the categories and measures of inflation, including those for all income groups, declined in August, reflecting the trend of declining inflationary pressure,” CBK said.
The overall inflation declined from 10.05 percent in June to 7. 74 per cent in July and further to 6.09 per cent in August, with the CBK attributing this to continued reduction in food and fuel prices as well as easing demand pressures in the economy.
Non-food-non-fuel inflation declined from 8.48 percent in July to 7.84 percent in August while the 3-month overall inflation also declined in the period.
“These developments supported a positive outlook for a continued decline in inflation,” the Committee noted during their deliberations.
The East African nation has successfully met the conditions for disbursement of the 600 million U.S. dollars syndicated loan in the fiscal year 2011/12 and has already received the first tranche.The disbursement has improved the CBK foreign exchange reserves position and provided a further cushioning against external shocks affecting the exchange rate.
The committee noted that confidence in the economy remains strong as indicated by the continued recovery of the Nairobi Securities Exchange index.
“The country’s policy environment remains strong as depicted by the latest sovereign credit rating by Fitch Ratings which affirmed Kenya’s rating at’B+ with stable outlook’,” the CBk said.
In addition, it said, the MPC Market Perceptions Survey conducted in August showed that the private sector expects inflation to continue declining, the exchange rate to remain stable, and the economy to be resilient in 2012.
According to CBK, the exchange rate remained stable, fluctuating within a narrower range of 83.90 shillings to 84.32 shillings against the dollar in August, compared with a range of between 83.93 shillings and 84.53 shillings in July.
The foreign exchange reserves position of the apex bank stood at 5,136 million dollars or 4.2 months of import cover at the end of August and this, the committee said will cushion the market against external shocks and enhance confidence in the economy.
According to MPC, the data presented and stress tests indicated that the banking sector remains strong and stable, adding that credit risk remains low as depicted by the ratio of gross non- performing loans to total loans which remained unchanged at 4.5 percent between June and July.
The apex bank said it has continued to engage the Kenya Bankers Association to put in place contingency measures to deal with threats of loan defaults, including providing avenues that reduce the cost of doing business for banks.
“For example banks have integrated with mobile phone financial services platforms that have lowered the transaction costs immensely and have also moved into the agency banking network, with huge cost reductions,” CBK said.
The committee noted that interest rate spreads remained high suggesting that these cost reductions had yet to be fully transferred to bank customers and the economy at large through declining cost of credit. (Xinhua)
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