CBK cuts base lending rate to 8.5%

The Central Bank of Kenya (CBK) has cut its base lending rate to 8.5 percent from 9 percent, marking the first adjustment to the Central Bank Rate (CBR) in 15 months.

The decision to trim the rate will come as a relief to holders of loans taken during the rate cap environment which will see the effective charged interest rate come down by 0.5 percent.

In a statement issued on Monday afternoon, the regulator, which recently regained its diminished monetary policy setting role with the lifting of the rate caps, attributed it’s decision to the need to lift economic growth.

“The Monetary Policy Committee (MPC) noted that inflation expectations remained well anchored within the target range, and assessed that the economy was operating below its potential,” noted the CBK in an issues statement.

“Furthermore, the Committee noted the ongoing tightening of fiscal policy and concluded there was room for accommodating monetary policy to support economic activity.” It added

The downward revision largely fits to the expectations of investments analysts who hoped for a cut to aid in the recovery of economic growth for the remainder of the year.

“We believe that a further cut will be necessary to provide the required economic growth stimulus, further boosted by the repeal of the interest rate cap, which going forward is expected to provide more efficient transmission of monetary policy as opposed to the interest rate cap era,” noted researchers from Cytonn Investments in a note.

The rate cut is widely supported by a stable inflation which came in at five percent in October and well within the prescribed range of 2.5 to 7.5 percent against intermittent fluctuations in food prices.

Further, the lowering of the lending base by the CBK in backed by the narrowing of the current account balance which shrunk to 4.1 percent in September from 5.1 percent year over year on the back of improved transport & tourism earnings and lowered imports on food and SGR related equipment.

At the same time, CBK usable foreign exchange reserves have remained resilient at Ksh.891.4 billion ($8.8 billion) or an equivalent 5.5 equivalent month import cover.

The Monetary Policy Committee (MPC) welcomed its newly found footing in the repeal of interest rates with members now expectant of a clarity in monetary policy transmission.

“This reform should restore the clarity of monetary policy decisions and strengthen the transmission of monetary policy,” added the MPC.

The re-calibration of the CBR is expected to be an indicator to market players on the trimming of credit pricing with the CBK keen on lifting liquidity to the private sector.

Private sector credit growth has remained below its five year average in spite sectors such as consumer durable marking a sustained flow under the rate cap environment.

The CBK’s Monetary Policy Committee had for the last three years remained relatively ineffective as the interest rate tied any adjustments to the CBR with the rate charged in the real economy at the hip.

According to a recent study by the bank, the effects of the MPC’s role which previously took between three and 12-months to hit home were stretched out to between 12 and 20 months to truncate CBK’s role in impacting economic growth.