Central bank cuts base lending rate to 8.5 from 9 per cent

The central bank has cut the base lending rate to 8.5 per cent from the previous 9 per cent.

In a statement, the MPC noted that the move has led to a significant rationing of credit. “This reform should restore the clarity of monetary policy decisions and strengthen the transmission of monetary policy. Further banks have adopted the banking sector charter, which defines a commitment to entrench a responsible and disciplined banking sector responsive to needs of customers,” said Patrick Njoroge, Chairman Monetary Policy Committee.

The MPC noted that inflation expectations remained well anchored within the target range, and assessed that the economy was operating below its potential level.

The Committee further noted the ongoing tightening of fiscal policy and concluded there was room for accommodative monetary policy to support economic activity. “The MPC therefore decided to lower the Central Bank Rate (CBR) to 8.5 percent from 9 percent. The Committee will closely monitor the impact of this change in its policy stance.”

Month-on-month overall inflation remained well anchored within the target range in September and October 2019, largely due to relatively stable food prices and lower cost of energy.

The inflation rate stood at 4.9 percent in October compared to 3.8 percent in September, mainly reflecting temporary effects of increases in the prices of maize grain and sifted flour. Non-food-non-fuel (NFNF) inflation remained below 5 percent, indicative of muted demand pressures and limited spillover effects of the excise tax indexation in July.

Overall inflation is expected to remain within the target range in the near term due to lower food prices following improved weather conditions, and lower electricity prices.

The November excise tax adjustments in the Finance Act 2019 are expected to only have a marginal impact on inflation.

Private sector credit grew by 6.6 percent in the 12 months to October, compared to 7.0 percent in September. Strong growth in credit to the private sector was observed in the following sectors: trade (8.5 percent); finance and insurance (15.1 percent); consumer durables (28.6 percent); and private households (6.9 percent).

Growth in private sector credit particularly to Micro, Small and Medium-sized Enterprises (MSMEs) is expected to increase due to the deployment of innovative credit products targeting the sector, and the repeal of interest rate caps.

The economy remained resilient in the first half of 2019 despite the slowdown in agricultural production following the delayed onset and below average rainfall. Real GDP grew by 5.6 percent in the first half of 2019 supported by the non-agriculture sector particularly services. Leading indicators of economic activity suggest stronger growth in the second half of 2019, supported by agricultural production, growth of MSMEs, implementation of the Big 4 agenda, foreign direct investment and a stable macroeconomic environment. 

The MPC Private Sector Market Perception Survey conducted in November 2019 indicates that inflation expectations remain well anchored, mainly due to lower food prices following improved weather conditions. Respondents remained optimistic on economic prospects due to, among other factors, improved weather conditions, payments of pending bills by the government, growth in tourism, the expected increase in lending to MSMEs following the repeal of interest rate caps, implementation of the Big 4 agenda projects, ongoing public infrastructure investments, and a stable macroeconomic environment. Nevertheless, the optimism is moderated by concerns about the delay in the clearance of pending bills, reduced demand of some products, and the slowdown in global growth.