The MPC said its decision was informed by the need to boost economic activity in the country.
The decision came against the backdrop of proposed changes to the nearly two-year old rate cap law.
The Treasury is pushing for the scrapping of the controls even as MPs vowed that they would scuttle the bid.
The Central Bank of Kenya (CBK) has cut the benchmark lending rate by 0.5 percentage point, signalling a drop in the cost of loans by a similar margin and offering relief to millions of borrowers.
This is the second time that the banking sector regulator has cut the signal rate since legal caps were introduced on the cost of credit nearly two years ago.
The Monetary Policy Committee (MPC) fixed the benchmark rate at nine per cent from 9.5 per cent, meaning banks are now required to charge borrowers a maximum of 13 per cent interest on loans.
The MPC said its decision was informed by the need to boost economic activity in the country.
CBK governor Patrick Njoroge, who chairs the MPC, said a relatively stable forex market, a narrower current account deficit and a build-up of forex reserves that cushion the economy from unforeseen shocks informed the decision to cut the base rate.
The MPC decision came against the backdrop of proposed changes to the nearly two-year old rate cap law.
The Treasury is pushing for the scrapping of the controls even as MPs vowed that they would scuttle the bid.
Dr Njoroge said the regulator’s survey showed there is increased optimism on growth prospects, but added that the economic output was “below its potential level.”
The country recorded economic growth of 5.7 per cent in the first quarter of this year, compared to 4.8 per cent in the first quarter of 2017.
“The MPC 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,” said Dr Njoroge in a statement Monday.
“Consequently, while noting the risk of perverse outcomes, the Committee decided to lower the Central Bank Rate (CBR) to 9.00 per cent from 9.50 percent.”
The reduction in the benchmark rate came following release of fresh data showing private sector credit grew 4.3 per cent in the 12 months to June this year, higher than the 2.8 per cent credit growth recorded in April this year. The credit growth remained well below the central bank’s target rate of 12-15 per cent, a growth adequate to support economic development.
“Growth in private sector credit is expected to pick up gradually with the continued recovery of the economy,” said Dr Njoroge.
CBK noted credit to the manufacturing, building and construction, and trade sectors grew by 12.3 per cent, 13.5 per cent, and 8.6 per cent, respectively.
Credit growth
“Credit growth to other sectors was positive except for transport and communication, agriculture, and mining and quarrying,” he said.
The capping of lending rates has been blamed for lower loans growth especially for small firms as banks opt for government paper.
Kenya capped commercial lending rates in September 2016 at four percentage points above the central bank’s benchmark rate, saying they were too high and banks had repeatedly failed to lower them.
Kenya’s year-on-year inflation rose to 4.28 per cent in June from 3.95 per cent the previous month, remaining within the government’s preferred band of 2.5 - 7.5 per cent.
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