Central Bank Rate Retained At 9% After MPC Meeting

The Central Bank of Kenya (CBK) has retained the Central Bank Rate (CBR) at 9 percent, automatically retaining the letting interest rate at 13 percent in the latest MPC meeting.

“The MPC concluded that the current policy stance remains appropriate, and therefore decided to retain the CBR at 9.00 percent,” said the Monetary Policy Committee, chaired by CBK Governor Patrick Njoroge.

Month-on-month overall inflation remained relatively stable and within the target range in May and June 2019 according to the Committee. The inflation rate stood at 5.7 percent in June compared to 5.5 percent in May.

Food inflation rose to 6.6 percent in June from 6.0 percent in May, reflecting increases in the prices of non-vegetable food crops particularly maize, due to uncertain supply.

Non-food-non-fuel (NFNF) inflation remained below 5 percent, indicative of muted demand pressures and spillover effects of the recent rise in fuel prices.

Overall inflation is expected to remain within the target range in the near term largely due to expectations of lower food prices following improved weather conditions, and lower electricity prices with the reduced reliance on expensive power sources.

“The effect of July 1, 2019, excise tax indexation is expected to have a moderate impact on inflation,” MPC said.

The foreign exchange market has remained relatively stable, supported by the narrowing of the current account deficit to 4.2 percent of GDP in the 12 months to June 2019 from 5.4 percent in May 2018.

The narrowing reflects strong growth in diaspora remittances, the resilient performance of exports particularly horticulture, higher receipts from tourism and transport services and slower growth in imports of food and SGR-related equipment.

The current account deficit is expected to narrow to 4.5 percent of GDP in 2019 from 5.0 percent in 2018.

The CBK foreign exchange reserves, which currently stand at USD 9,568 million (6.0 months of import cover), continue to provide adequate cover and a buffer against short-term shocks in the foreign exchange market.

Private sector credit grew by 5.2 percent in the 12 months to June, compared to 4.4 percent in May.

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Strong growth in credit to the private sector was observed in the following sectors:

• Manufacturing at 11.4 percent
• Consumer durables at 21.3 percent
• Private households at 7.6 percent

Private sector credit growth is expected to continue to strengthen in the remainder of 2019, partly due to the rollout of innovative, bank-initiated credit products targeting Micro Small and Medium Enterprises (MSMEs).

The banking sector remains stable and resilient. Average commercial banks’ liquidity and capital adequacy ratios stood at 50.6 percent and 18.2 percent, respectively, in June.

The ratio of gross non-performing loans (NPLs) to gross loans stood at 12.7 percent in June compared to 12.9 percent in April, partly due to decreases in NPLs in the manufacturing, building and construction, financial services and electricity and water sectors.

Banks have continued with mitigation measures against NPLs, including enhanced recovery efforts. This has been supported by the recent payments of pending bills by the Government.

The economy remained strong in the first quarter of 2019, despite the effects of the delayed long rains on agricultural production.

Real GDP growth stood at 5.6 percent, reflecting a stronger than expected performance of agriculture and a resilient services sector, particularly information and communication, accommodation and restaurants, and transport and storage.

Leading indicators of economic activity point to stronger growth in the second quarter of 2019.

Consequently, growth in 2019 is expected to remain strong, supported by agricultural production, strong growth of MSMEs and the service sector, foreign direct investment, and a stable macroeconomic environment.

Additionally, the alignment of the FY2019/20 Government Budget to the Big 4 priority sectors is expected to boost economic activity in manufacturing, agriculture, construction and real estate, and health sectors.

The MPC Private Sector Market Perception Survey conducted in July 2019 indicates that inflation expectations remain well-anchored within the target range, mainly due to expectations of lower food prices following improved weather conditions.

The Committee noted the gradual demonetization (withdrawal of the older KSh. 1,000 notes) and the close monitoring by CBK will ensure that the process is not disruptive to the economy.

The MPC noted increased uncertainties in the global economy. Global economic growth in 2019 is likely to be weaker than previously anticipated, largely due to escalating trade tensions between the U.S. and China, increased concern with regard to the resolution of Brexit, and volatility in international oil prices partly due to heightened geopolitical tensions.

These developments may result in increased instability in the global financial markets.