Central Bank of Kenya has increased the base lending rate by another 150 basis points to 11.5%, signalling its intention to tighten liquidity by raising the cost of credit.
The Monetary Policy Committee (MPC), sitting for the first time under new CBK Governor Dr Patrick Njoroge, said the move to raise the Central Bank Rate (CBR) from 10%, which was set last month at a special sitting, is aimed at slowing down inflation and shoring up the shilling.
The Kenya shilling has remained under pressure, mainly reflecting the strengthening of the US dollar against most currencies and dwindling dollar inflow due to a slump in town among others factors. Also, the current account deficit widened in part due to increased imports of capital equipment and weak exports.
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However, diaspora remittances remain resilient. Interventions by Central Bank of Kenya (CBK) through direct sale of foreign exchange to commercial banks in periods of short-term exchange rate have dampened volatility.
“Furthermore, the MPC decided to augment its instruments for liquidity management by introducing a three-day Repo,” Dr Njoroge said in a statement after the MPC meeting. “The MPC will continue to monitor external and domestic developments and their implications on the risks to the overall price stability. In particular, the Committee noted the need to closely monitor liquidity conditions.”
In view of the new CBR, the CBK has revised the Kenya Banks Reference Rate (KBRR) consistent with its commitment in January 2015 from 8.54% to 9.87% effective 7th July, 2015. This is the rate banks use to price their loans.
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