CBK raises base lending rate to 7pc

September 14, 2011

, NAIROBI, Kenya Sep 14 – The Central Bank’s Monetary Policy Committee has raised its benchmark interest rate (CBR) by 75 basis points to seven percent from 6.25 percent. 

In a meeting on Wednesday, the MPC reviewed the outcomes of various measures that had been taken to stabilise the market as well as analyse the direction and results of various policies.

In a statement sent to newsrooms, CBK Governor Prof Njuguna Ndung’u said in reviewing the market reactions to the domestic and international events, the committee noted that there was need for a strong, well coordinated statement of the framework in which actions would be taken.

“In this way, possible confusions in the market would be minimised and hence stability in the various markets will be ensured,” Prof Ndung’u said.

As well as raising the CBR, the MPC also decided that the current requirement that banks maintain their Cash Reserve Ratio (CRR) based on a 30-day average with a floor of three percent should be maintained. This was done to facilitate commercial banks’ liquidity management.

“The committee noted that other countries had successfully solved short term liquidity problems using this framework,” he said.

The CBK has been under immense pressure to tighten monetary policy and reign in runaway inflation as well as weakening shilling.

August inflation rose for the eight consecutive time hitting 16.67 percent further pushing up the cost of living in the country.

The shilling has lost more than 15 percent against the dollar this year and many analysts say the central bank had failed to act aggressively enough to support it.

The rise in the cost of living has also gained momentum from a weakening local currency, which has increased the cost of imported goods and complicated the management of monetary policy.

Though central banks have traditionally responded to inflationary pressure with a tightening of monetary policy, a fragile growth and a build-up of public debt to more than half the gross domestic product has made the Kenyan situation much more complex for the CBK to step in fully to adjust monetary policy.

“The MPC believes that with these measures and others which are ongoing in liquidity management, the economy will be cushioned from inflationary pressure and domestic prices stabilised while providing a flexible space for banks to manage their liquidity efficiently,” Prof Ndung’u said.

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