CBK rate cut by 25 basis points

January 27, 2011

, NAIROBI, Kenya, Jan 27- The Monetary Policy Committee of the Central Bank of Kenya (CBK) has once again surprised the market by cutting the Central Bank Rate by 25 basis points to 5.75 percent.

The slashing of the benchmark policy rate is a signal from the CBK to local commercial banks to reciprocate and lower their lending rates in order to stimulate access to affordable credit for the private sector.

"Even though the banks had generally lowered their base lending rates, the committee concluded that there is adequate scope to lower the rates further. The committee therefore decided to lower the CBR by 25 basis points to 5.75 percent," said the MPC in a statement.

This is the eighth time in recent months that this rate has been slashed as the Central Bank continues to maintain its monetary policy stance that has so far been successful as indicated by robust economic growth, a low and stable inflation regime and decreased volatility in the interbank rate.

During its Thursday meeting to assess and evaluate the performance of the economy, the committee observed that the CBR was effective in coordinating movement in short term interest rates.

There have been fears that the ongoing drought in some parts of Arid and Semi Arid Areas will result in a spike in interest rates and inflation.
However, the committee assured that there are no foreseen upside risks to inflation in the near term especially going by the overall inflation of 4.5 percent for December 2010 which was below the target of 5 percent.

"The government has put adequate measures in place to resolve food distribution challenges. Any additional inflationary risk emanating from rising oil prices should be mitigated by economic growth," the team pointed out.

The same assurance was also given for the government\’s borrowing programme, which although is a poor indicator of the monetary policy stance, the policy team further observed, was unlikely to exert upward pressure on market interest rates.

The Committee that is chaired by CBK governor Prof Njuguna Ndung\’u also examined the key macroeconomic indicators which are still showing strong economic recovery and higher potential growth for the future.

Economic growth, they said was broad based, driven by sectors such as agricultural, trade, manufacturing and ICT and is underpinned by a stable macroeconomic environment, an expanding private sector credit and a rise in imports of investment and intermediate goods.

"Economic growth in the third quarter of 2010 was 6.1 percent and indications are that this growth momentum can be sustained towards meeting the Government\’s Vision 2030 growth trajectory," the MPC said.

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