NAIROBI, Kenya, Jul 29 – The Monetary Policy Committee (MPC) of the Central Bank of Kenya has surprised the market following the announcement that it has lowered the Central Bank Rate (CBR) by 75 basis points to six percent.
All indications were that the CBK would retain the benchmark policy rate at 6.75 percent particularly since inflation and interest rates continue to be on the decline.
The move is thus interpreted to be a signal that the CBK would like to see commercial banks lower their lending rates in order to stimulate access to credit for the private sector.
“The Committee is of the strong view that private sector investment should be supported with adequate and affordable credit. Even though the banks have generally lowered their base and lending rates, the Committee notes that there is scope to lower the rates further,” said MPC Chairman Prof Njuguna Ndung’u in a statement.
This is the seventh time in recent months that this rate has been slashed and now focus will shift to banks to see whether they will reciprocate and reduce their rates as well.
The MPC Market Perception Survey showed increased optimism for economic growth, declining inflation threat and minimal exchange rate volatility in the near term.
“The upside risks to inflation are still low given adequate food supply, exchange rate stability and declining energy prices. In addition, there is no threat of monetary driven inflation,” the committee further pointed out.
Standard Chartered Head of Regional Research for Africa Razia Khan argued in a statement late on Wednesday that although the move was unexpected, the recent stabilisation of the Kenyan currency has provided the authorities with a window of opportunity to act on interest rates.
“The shilling sell-off in the midst of the euro crisis had represented one of the key risk factors to price stability going forward. It is now judged to be less of a concern,” she said adding that the MPC was further encouraged by the decline in short term interest rates, and the rise in domestic credit to 26.6 percent year on year.
However, she said it is unlikely that this news will stop the appreciation ‘trajectory’ of the local currency which should also gain should the referendum vote on August 4 pass peacefully.
