Kenya: Central Bank cuts main policy rate to 10.00% to support private sector credit growth
September 20, 2016
The Central Bank of Kenya (CBK) cut its main policy rate, the Central Bank Rate (CBR), from 10.50% to 10.00% on 20 September. By cutting the rate, the CBK hopes to support lending to the private sector, and thus to counter the expected negative impact of the government’s decision to limit commercial banks’ interest rates at 4 percentage points above the CBK’s benchmark rate. The interest rate cap became effective in mid-September and, in the CBK’s view, it risks denting private sector credit and economic activity as it limits banks’ capacity to adequately charge for risk. The CBK expressed its worries about this development in stating that, “the Committee remains concerned about the persistent slowdown in private sector credit growth.” It pledged to “continue to put in place measures to sustainably reduce the cost of credit and improve liquidity management.” The rate cut surprised market analysts, who had expected the Central Bank to lower the rate at a later stage.
According to the Bank, the inflation outlook and a stable shilling also justified a rate cut. Inflation receded from 6.4% in July to 6.3% in August, resting within the target range of 5.0% plus/minus 2.5 percentage points, and the CBK sees inflation falling further going forward. The Kenyan currency has been broadly stable lately, supported by a narrowing of the still wide current account deficit on the back of increased earnings from tourism, tea and horticulture as well as a low oil import bill. Meanwhile, the Bank sees that rising foreign reserves and the IMF’s precautionary arrangement together provide an appropriate cushion for potential external shocks. The Bank also noted there were signs of a stabilization in the banking sector.