CBK cuts base lending, commercial bank reserve rate to cushion economy

The Central Bank of Kenya (CBK) has trimmed its base lending rate to 7.25 per cent from 8.25 per cent in January as it seeks to support credit issuance amidst looming coronavirus distresses.

In a statement, CBK also noted that the Monetary Policy Committee (MPC) had recommended slashing commercial bank reserve rate (CRR) for the first time since 2012 to 4.25 per cent from 5.25 per cent. This it added will free up Ksh.35.2 billion in additional liquidity to banks to support lending.

“In light of the adverse economic outlook, the Monetary Policy Committee  therefore decided on the following policy actions to prevent the Covid-19 health crisis from becoming a severe economic and financial crisis,” noted the CBK in a press statement.

The MPC however indicated that its Private Sector Market Perception Survey conducted in early March had shown continued stability in growth but now dampened COVID-19.

“Trade flows have been significantly disrupted, while the continued volatility in international financial markets will worsen this outlook,” the CBK added.

Already, the CBK expects the country’s 2020 economic growth to fall towards an 11 year low 3.4 percent, a rate last seen in the aftermath of the 2008-2009 financial crisis as the demand for exports slack from disruptions to supply chain and domestic production.

The foreign exchange market has seen the greatest volatility as the US dollar strengthens with the local unit for instance extending weakening to close at 106.63 at the close of trading on Monday.

Meanwhile CBK usable foreign currency reserves fell in the week ending Friday to $8.3 billion (Ksh.880 billion) as the bank tapped onto the reserves to settle a syndicated loan which fell due in the week.

The reserves which now represent and equivalent flat five-month import cover remain below targets as the reserve bank undertakes the purchase of dollars to June in an effort to shore up.

While the banking sector has remained stable with optimum capital adequacy and liquidity ratios, the industry’s rate of non-performing loans has grown to 12.7 percent as of February from 12 per cent in December to signal a worsening asset quality in the financial sector.

Meanwhile, Private sector credit has levelled up at 7.7 per cent in the 12 months to February the same rate as it were in December 2019.

The opening of taps by the reserve bank are geared at freeing up new borrowing by Kenya’s Private Sector to boost output against the slowing reduction in activity.