Banks credit transparency urged as CBK rate stays at 11.5pc

March 21, 2016
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According to the MPC, the planned reduction in government expenditures should continue to ease pressures on domestic borrowing and interest rates/FILE
According to the MPC, the planned reduction in government expenditures should continue to ease pressures on domestic borrowing and interest rates/FILE

, NAIROBI, Kenya, Mar 21 – The Central Bank’s Monetary Policy Committee (MPC) has retained its lending rate 11.5 percent with the committee urging commercial banks to reduce operating costs and enhance transparency in the pricing of credit.

According to the MPC, the planned reduction in government expenditures should continue to ease pressures on domestic borrowing and interest rates.

The MPC has maintained the CBR at 11.5 percent for the last five consecutive meetings on account of stability in the foreign exchange market, improvement in Forex reserves and a narrowing current account deficit.

CBK’s foreign exchange reserves currently stand at US$7.3 billion (equivalent to 4.7 months of import cover) up from US$7 billion (equivalent to 4.5 months of import cover) at the last MPC Meeting.

“The approval on March 14 of new IMF precautionary arrangements amounting to US$1.5 billion covering two years reflects confidence in the country’s macroeconomic policies and provides additional buffers against short-term shocks,” the committee said in a statement.

On the other hand, the foreign exchange market has remained stable with the shilling steady at Sh101.5 levels, even as the global markets were volatile due to pressures from China’s financial markets, and uncertainties in the advanced economies.

Average commercial banks’ lending rates declined to 17.9 percent in February 2016, from 18.3 percent in December 2015.

Overall inflation fell to 6.8 percent in February 2016, from 7.8 percent in January, now within the Government’s target range of 2.5 to 7.5 percent.

During periods of high inflation or a rapidly depreciating shilling, the MPC raises CBR to curb inflationary pressures and stabilise the shilling.

A higher CBR makes it more expensive for consumers to borrow to fund consumption and investment expenditure, which reduces liquidity, in turn reducing inflationary pressures.

The opposite is true in a low inflation environment.

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