CBK lowers policy rate for the first time in 9 months

The Central Bank of Kenya’s (CBK) Monetary Policy Committee Monday cut its indicative pricing of loans, the CBR, for the first time in nine months, citing a drop in inflation and stability of the shilling in the past three months.

The one percentage point cut in the policy rate is, however, not expected to impact on the retail price of loans because the standard base rate used by the lenders — commonly known as the KBRR — is reviewed bi-annually.

Non-performing loans have ballooned in the past nine months which has been attributed to high interest rates, averaging 18 per cent, in a harsh business environment.

“The MPC concluded that there was space for an easing of monetary policy while continuing to anchor inflation expectations. The MPC therefore decided to lower the CBR by 100 basis points to 10.5 per cent,” said CBK governor Patrick Njoroge.

Dr Njoroge said the ratio of bad loans to the industry’s total loan book was 8.2 per cent in April 2016, which he attributed to better reporting standards. “The CBK will continue to monitor credit and liquidity risks, which remain concerns,” he said.

Key economic indicators have improved in the past since the beginning of the year offering enough headroom for a cut in the policy rate.

Inflation stood at 5.3 per cent in the month of April, the lowest level since June 2013, while the shilling has remained stable around Sh100 to the dollar.

Foreign reserves held by CBK stand at Sh769 billion being five times the country’s monthly import bill, above the statutory four month import cover. The CBK also has a precautionary loan facility with the IMF for protecting the local currency.

The shilling has also benefited from a drop in the size of the country’s import bill and the value of goods exported due to lower fuel prices.
The deficit is currently 6.8 per cent of GDP down from 9.8 per cent in 2014.

The cut was a shock to the market with analysts stating they expected a retention of the current rate or a cut of up to 50 basis points.

MPC is expected to revise the base lending rate KBRR in June. KBRR is pegged on the Central Bank rate and average 91 day Treasury bill giving hope of reduced lending rates in the second half of the year.