CBK retains lending rate optimistic that inflation will continue to decline

Central Bank of Kenya (CBK) Monetary Policy Committee has retained the base lending rate at 10 per cent for the seventh consecutive time.

“The MPC therefore, decided to retain the Central Bank Rate (CBR) at 10.0 percent in order to continue to anchor inflation expectations,.” read the MPC statement issued on Monday after the meeting.

According to the MPC, the meeting was held against a backdrop of declining food prices, sustained macroeconomic stability, and continued resilience of the economy.

“Overall inflation is expected to continue to decline over the next few months, supported by lower food and fuel prices,” said the MPC. “The MPC Private Sector Market Perception Survey conducted in July 2017 showed that inflation was expected to decline due to lower food prices and Government interventions already in place.”

Read: Analysts expect CBK to hold benchmark interest rate on Monday 

The fall in prices of these key food items reflected the impact of the recent rains, and Government measures. Non-food-non-fuel (NFNF) inflation has remained below 5 percent over the last seven months, suggesting that demand pressures remain Subdued.

The committee said private sector credit growth fell further to 2.1 percent over the 12 months to May 2017, partly due to significant repayments in manufacturing, transport and communication, and developments in the trade sector.

The Committee continues to monitor the implications of the capping of interest rates on lending and the transmission of monetary policy. “What this means is that banks will lend at a maximum 14 per cent for the next two months and pay term depositors not less than 7 per cent.”

The Committee noted that the foreign exchange rate was relatively stable despite a widening current account deficit at 6.2 percent of GDP in May from 6 percent in March.

“The current account deficit is expected to narrow in the second half of 2017 in part due to resilient tea and horticulture exports, stronger diaspora remittances, and continued recovery in tourism,” the MPC said.