Central Bank lowers base lending rate from 8.50% to 8.25%

The Central Bank of Kenya (CBK) has once again lowered the benchmark lending rate in a move it says is aimed at  supporting economic activity.

In a statement to newsrooms, CBK Governor Patrick Njoroge said the drop of the Central Bank Rate (CBR) to 8.25% from a previous 8.50% is expected to spur lending by commercial banks.

The Monetary Policy Committee of the Central Bank of Kenya further noted that the trimming of the CBR was in line with the repeal of the Interest Rate Capping law in November 2019.

“The Committee assessed that the effects of the lowering of the CBR in November 2019 continued to be transmitted in the economy, but also noted that there was room for further accommodative monetary policy to support economic activity,” noted the CBK in its Monetary Policy Committee (MPC) meeting press statement on Monday.

The latest cut follows prior easing in November when the reserve bank trimmed the base lending rate to 8.5 percent up from nine percent.

Further, the MPC made note of tightening fiscal policy and amidst the economy’s operation below its potential level.

While the economy had remained resilient across 2019, data from the third quarter surprised as output fell to 5.4 percent from an average 5.6 percent in the first half of the year to signal lower than expected growth for the year.

Meanwhile, private sector credit grew by an average of 7.1 percent for the year but failed to break the double digit historical average ceiling from the expected recovery which was pinned on the lifting of interest rate caps in early November.

The CBK expects a stronger economic recovery in 2020 as inflation expectations remains well anchored even as pitfalls remain in the form of potential post-harvest losses from the recent disruptive rainfall and locust invasion which has the likelihood of exerting upward pressure on food prices.

“Respondents remained optimistic on economic prospects due to, among other factors, payments of pending bills by the government, improving weather conditions, implementation of the Big 4 agenda projects, improved lending to the private sector following the repeal of interest rate caps, renewed focus by the Government on agriculture and MSMEs, and a stable macroeconomic environment,” the CBK highlighted results from its January market perception survey.

The cut on the CBR is however somewhat a surprise to the market, with the majority of stakeholders having anticipated a hold on the base rate pending the review of the last policy translation.

Nevertheless, the cut sits within long-term expectations of monetary easing with early sentiments indicative of a compounded 100 basis points cut for the year.