CBK cuts main loan rate, lowers growth estimate to 12-year low

The Central Bank of Kenya (CBK) has cut its benchmark rate by the largest margin in three and half years and lowered the amount of deposits banks must hold with the regulator in efforts to boost flow of cheap loan in an economy plagued by the coronavirus outbreak.

The benchmark rate was on Monday cut by 100 basis points or one percentage point to 7.25 percent, a pointer of policy bias towards cheaper loans in an environment where the government is not controlling cost of credit.

The regulator also reduced the cash reserve ratio for commercial banks to 4.25 percent from 5.25 percent, saying the move will release an extra Sh35.2 billion for lending to customers hit by the outbreak, the Monetary Policy Committee said.

This is the first time since 2008, at the peak of the global financial crisis and the deepest world recession for a generation, that the CBK is cutting the cash reserve ratio.

The extra billions of shillings will provide banks with low-cost funds for lending to households and small businesses expected to suffer reduced cash flow due to the virus.

"The Monetary Policy Committee (MPC) met on March 23, 2020, in the context of the ongoing global Covid-19 (coronavirus) pandemic, which has devastated many countries, with significant human, economic and social costs," CBK Governor Patrick Njoroge said in a statement.

"In light of this adverse economic outlook, the MPC therefore decided…to lower the central bank rate to 7.25 percent from 8.25 percent (and) to reduce the cash reserve ratio to 4.25 percent from 5.25 percent, releasing Sh35.2 billion as additional liquidity availed to banks to directly support borrowers that are distressed as a result of Covid-19."

The bank has also cut its 2020 economic growth forecast from an initial estimate of 6.2 percent to 3.4 percent – the lowest growth rate since 2008 when Kenya was buffeted by the global financial crisis and effects of the bloody post-election violence.

Growth dropped from 7.1 percent in 2007 to 1.7 percent in 2008. Kenya has confirmed 16 cases of the coronavirus and its crucial tourism and farm exports have already been hit by the impact of the outbreak.

The government has responded with tough measures on travel and mass gathering and isolation rules meant to curb the spread of the virus.

On Sunday it imposed additional restrictions, including cancellation all international flights save for cargo planes, ordered shutdown of bars and nightclubs, with restaurants only allowed to operate takeaway services, banned church congregations and weddings, and capped funeral gatherings to 15 people.

The social distancing rules look set to impact on consumer spending, setting the stage for job cuts and unpaid leave for workers struggling with reduced cash flow.

Restrictions on foreigners coming into Kenya have delivered a big hit to the country’s tourism industry, with some hotels on the Coast reporting occupancy rates well below 10 percent compared to the normal 75 percent.

The restrictions in Europe have slashed daily flower orders to half for a continent that accounts for 70 percent of Kenya’s cut flower exports.

"The fundamental concerns and anxieties centre on the health impact, job losses, and duration of the crisis," said Dr Njoroge.

Credit to the private sector, the CBK said, grew by 7.7 percent in the year to February, compared to 7.1 percent in the year to December, which are both below the ideal growth level of between 12 and 15 percent to support economic growth.