NAIROBI, Kenya, Nov 24- The Central Bank of Kenya (CBK) has once again cut its lending rate by 75 basis points to seven percent indicating the government’s intention to continue reducing the cost of credit in the country.
A statement from the Monetary Policy Committee (MPC) said on Tuesday that this move to lower the Central Bank Rate (CBR) would boost lending to the private sector and therefore spur economic growth.
“Given that the upside risk to inflation is low and that credit risk is declining and in order to support the nascent economic recovery, the Committee considered that it was necessary to boost credit availability,” the MPC said in the statement to newsrooms.
This brings to five the number of times Central Bank has cut this rate this year as part of the measures that have been undertaken to control inflation and enhance economic growth that has been impacted negatively by both internal and external factors.
MPC Chairman Prof Njuguna Ndung’u who’s also the CBK Governor said the market has been responding to these signals as indicated by the growth of loans to the private sector.
“Both banks and the real sector understood the Committee’s earlier decisions and credit to the private sector was once more picking up,” he said.
Further, the efficiency of liquidity management by the banking sector is being enhanced through the horizontal repo uptake, the Governor added.
“Over the past three years, credit from the banking system to the economy has been key in driving economic growth. Despite cutting the rate from a high of 8.5 percent in March 2009, total domestic credit has only grown by 6.4 percent,” reckoned African Alliance Research Investment Analyst Francis Mwangi.
The introduction of a new methodology for calculating inflation which indicated that October inflation reduced by one percent point to 6.6 percent has also been hailed as a true reflection of the current cost of living.
“The cut on the CBR can be attributed to the lower recorded inflation. At an inflation of 6.7 percent it means that even if banks were to reduce their prime rates -estimated at 13.5 percent- they will still be earning a real rate of return,” Mr Mwangi added.
The economy has started showing signs of recovery as indicated by the improvement in tea and coffee prices which has aided rural recovery.
“The economy is riding over the global economic crisis and moving to a recovery path. In addition, Treasury’s stimulus package is similarly creating employment and augmenting spending power throughout the country,” Mr Ndung’u said.