MPC reduces Central Bank Rate to 9%

The Monetary Policy Committee (MPC) has lowered the Central Bank Rate (CBR) to 9.00% from 9.50 % to boost private sector growth.

In a statement issued after the MPC met on Monday, Central Bank of Kenya (CBK) Governor Patrick Njoroge said the committee noted that inflation expectations were well anchored within the target range, and that economic growth prospects were improving. Furthermore, economic output was below its potential level, and there was some room for further accommodative monetary policy.

“Consequently, while noting the risk of perverse outcomes, the Committee decided to lower the
Central Bank Rate (CBR) to 9.00% from 9.50%. The MPC will closely monitor the impact of this change in its policy stance. Other developments in the domestic and global economy will also be observed, and the MPC stands ready to take additional measures as necessary,”  he added.

The meeting was held against a backdrop of sustained improvement in economic fundamentals: a strong pickup in economic activity; increased optimism on the economic growth prospects; favourable weather conditions; and continued strengthening of the global economy.

Njoroge said month-on-month overall inflation remained within the target range in May and June 2018, largely due to lower food prices. The inflation rate was 4.3% in June compared to 4.0
percent in May 2018, mainly reflecting increases in energy prices.

Non-food-non-fuel (NFNF) inflation remained below 5%, indicating that demand-driven inflationary pressures are muted. Higher domestic fuel prices due to the recent increase in international oil prices, and the impact of the excise tax indexation on prices of some of the CPI items are expected to exert moderate upward pressure on inflation in the near term. Nevertheless,
overall inflation is expected to remain within the target range mainly due to expectations of lower food prices reflecting favorable weather conditions, he said.

The foreign exchange market remains stable supported by balanced inflows and outflows, and a continued narrowing in the current account deficit. The current account deficit narrowed to 5.8% in the 12 months to June 2018 from 6.3% in March 2018. It is expected to narrow further to 5.4% of GDP in 2018, with strong growth of agricultural exports particularly tea and horticulture, resilient diaspora remittances, and improved tourism receipts. Although the petroleum products import bill is expected to increase due to higher international oil prices, lower imports of food and SGR-related equipment in 2018 will moderate the impact on the current account.

He said CBK foreign exchange reserves remain high, and continue to provide an adequate
buffer against short-term shocks in the foreign exchange market. Currently, they stand at
USD8,834 million (5.9 months of import cover). The precautionary arrangement with the
International Monetary Fund equivalent to USD989.8 million, provides an additional
buffer against exogenous shocks.

Private sector credit grew by 4.3% in the 12 months to June 2018, compared to 2.8% in April 2018. Credit to the manufacturing, building and construction, and trade sectors grew by 12.3%, 13.5%, and 8.6%, respectively. Credit growth to other sectors was positive except for transport and communication, agriculture, and mining and quarrying. Growth in private sector credit is expected to pick up gradually with the continued recovery of the economy.

The banking sector remains stable and resilient. Average commercial banks’ liquidity and
capital adequacy ratios stood at 48.0% and 18.0%, respectively, in June 2018. The
ratio of gross non-performing loans (NPLs) to gross loans fell to 12.0% in June from 12.4% in April 2018, following a reduction in NPLs in the transport and communications, building and construction, tourism, personal/households, and mining and quarrying sectors, largely due to enhanced collection efforts.

A CBK survey of all the commercial banks in July 2018 showed that a large proportion of the current level of NPLs was due to delayed payments from government and private sector, slowdown in business activity in some sectors following the prolonged elections period in 2017, and a slow uptake of developed housing units in the real estate sector.

“Data for the first quarter of 2018 showed a strong pickup of the economy, with real GDP
growth of 5.7 percent compared to 4.8 percent in the first quarter of 2017. This outcome was
driven by a strong recovery in agricultural activity due to improved weather conditions, a
recovery of the manufacturing sector, and resilient performance of the services sector
particularly wholesale and retail trade, real estate, and tourism. Growth in 2018 is expected to
be strong, supported by continued recovery in agriculture, a resilient services sector, alignment
of Government spending to the Big 4 priority sectors, and the stable macroeconomic
environment,” said Njoroge.

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A preliminary assessment of the impact of the lowering of the CBR in March 2018 showed that
this change under the interest rate capping regime had a smaller and slower impact on key
macroeconomic variables such as credit and economic growth. Additionally, the risk of
perverse outcomes was not ruled out.