Kenya’s falling inflation, strong economic growth and an optimistic Private sector are some of the key indicators that prompted the Monetary Policy Committee at the Central Bank to cut its benchmark interest rate by 100 basis points to 10.5 per cent.
“Overall inflation is expected to decline and remain within the Government target range in the short-term,” the MPC said in a statement released on Monday.
However, the statement noted that, “There was policy space for an easing of monetary policy while continuing to anchor inflation expectations. The CBK will continue to monitor developments in the economy, and will use instruments at its disposal to maintain overall price and financial sector stability.”
The benchmark rate has been at 11.5 per cent since September 2015.
In the recent months, the country’s Inflation has fallen to 5.27 percent in April from 6.45 percent in March.
Explaining its decision on Tuesday, the central bank Governor Dr. Patrick Njoroge who is also the chair of the MPC projected a 6 percent economic growth in 2016 and the current account deficit projected at 5.5 percent of GDP in 2016 from 6.8 percent and 5.8 percent in 2017. He was quick to point that their main concern was the pace of the decline.
“The performance of the economy remains strong, posting a growth of 5.6 percent in 2015, from 5.3 percent in 2014. The MPC Market Perception Survey conducted in May 2016, shows that the private sector remains optimistic supported by macroeconomic stability, stronger agriculture performance, public infrastructure investment, and tourism recovery,” The MPC stated.
The MPC also noted that the shilling has remained stable this year, supported by a narrower current account deficit driven by cheaper oil imports, improved earnings from tea and horticulture exports and strong diaspora remittances.
This is similar to Cytonn Investments’ sentiments, “The Kenyan shilling has been stable since the beginning of the year appreciating 1.7percent against the dollar to exchange at Kshs 100.8 from Kshs 102.3 at the beginning of the year.” Cytonn indicated that since April, it had appreciated 0.9 percent due to a narrowing current account deficit at 11.4% of GDP from 14.5% of GDP in 2014 supported by
(i) a reduced import bill,
(ii) the high levels of forex reserves currently at USD 7.7 bn (equivalent to 5.0 months of import cover) compared to USD 7.4 bn (equivalent of 4.3 months of import cover) at the end of Q1 2016, and
(iii) improved diaspora remittances, which grew by 8.4percent in 2015.
The Monetary Policy Committee cited the stabilisation of the banking sector after the midsized Chase Bank was put into receivership last month. “The banking sector is resilient and has begun to stabilise following the successful and quick reopening of Chase Bank, which has enhanced confidence in the sector.”
However, consumers especially home buyers and businesses will have to wait longer for the retail lending rates to come down. Currently the average is remains at around 18 percent. The lending rates are linked to the Kenya Banks’ Reference Rate (KBBR). Further, as regards to the Non Preforming loans, CBK will continue to monitor credit and liquidity risks, with its improved IT systems and regular supervision.