•The MPC Private Sector Market Perception Survey conducted in January 2020 indicates inflation expectations remain well anchored, mainly due to expected lower food and electricity prices.
•The Committee will closely monitor the impact of this change to its policy stance.
The Monetary Policy Committee has lowered the base lending rate to 8.25 per cent from 8.5 per cent in its first sitting this year, as banks move to adjust to the post rate cap regime.
The Central Bank of Kenya's top decision making organ on Monday pegged its decision on domestic macroeconomic stability, despite potential risks posed by food supply and increased global uncertainties.
“Growth in private sector credit, particularly to Micro, Small and Medium-sized Enterprises is expected to increase gradually due to the deployment of innovative MSME credit products, the repeal of interest rate caps and the continued easing of credit risk,” CBK Patrick Njoroge said.
This is the second sitting after November's scrapping of interest rate law which for the last three years, was blamed for starving the private sector and households of credit, with ripple effects to the economy.
Banks have since September 2016 to November last year priced credit facilities at four percentage points above the CBK rate, which was retained at nine per cent for a better part of last year.
After the repeal, lenders are now at liberty to set their rates, which majority say will be based on the risk of a customer.
"For customers with higher risk profiles we may see a two to three per cent increase,"Kenya Bankers Association chairman and KCB Group CEO Joshua Oigara said.
The MPC's Private Sector Market Perception Survey conducted in January 2020 indicates that inflation expectations remain well anchored, mainly due to expected lower food and electricity prices.
However, some respondents expect that the recent disruptive rainfall and locust invasion in some parts of the country could lead to post-harvest losses and exert moderate upward pressure on food prices.
According to CBK, respondents remained optimistic on economic prospects due to, among other factors, payments of pending bills by the government, improving weather conditions and implementation of the Big 4 agenda projects.
There is also expected improvement of lending to the private sector following the repeal of interest rate caps, renewed focus by the government on agriculture and MSMEs, and a stable macroeconomic environment.
The MPC said that inflation expectations remained well anchored within the target range, the economy continued to operate below its potential level and the tightening of fiscal policy.
“The Committee assessed that the effects of the lowering of the CBR in November 2019 continued to be transmitted in the economy, but also noted that there was room for further accommodative monetary policy to support economic activity,” Njoroge said.
“The MPC therefore decided to lower the CBR to 8.25 percent from 8.50 percent. The Committee will closely monitor the impact of this change to its policy stance,” he added.
The banking sector, Njoroge said, remains stable and resilient. Average commercial banks’ liquidity and capital adequacy ratios stood at 49.7 per cent and 18.8 per cent, respectively, in December 2019.
The ratio of gross non-performing loans (NPLs) to gross loans declined further to 12.0 per cent in December from 12.3 per cent in October 2019.
“There were decreases in NPLs in the trade, real estate, financial services, manufacturing and personal,household sectors, reflecting repayments due to enhanced recovery efforts by banks, as well as write-offs,” CBK notes.