CBK retains base lending rate at 9.5% on easing inflation

The Central Bank of Kenya has retained its base lending rate at 9.5 per cent as it forecasts easing inflation, which declined to 7.9 per cent in April.

The apex bank's Monetary Policy Committee (MPC) on Monday said the government's measures to allow duty-free imports on specific food items, including sugar, are expected to moderate prices and ease domestic inflationary pressures.

Inflation, a measure of the cost of living, declined to 7.9 per cent in April 2023 from 9.2 per cent in March, mainly driven by lower food prices.

Food inflation declined to 10.1 percent in April from 13.4 per cent in March due to lower prices of vegetables due to the on-going rains, and improved supply of select non-vegetable food items.

Fuel inflation however remained high at 13.2 per cent in April, largely reflecting increases in electricity prices due to higher tariffs, and the scaling down of the fuel subsidy.

"Food inflation is expected to moderate in the coming months following the long rains, and lower global food prices," CBK governor Patrick Njoroge said in a statement.

However, the recent increases in electricity prices, the removal of the fuel subsidy, and a sharp rise in sugar prices are expected to exert moderate upward pressure on overall inflation.

The CBK raised the base-lending rate to 9.5 per cent at the end of March from 8.75, to tame the runaway inflation.

This increased interest rates at which commercial banks are offering loans.

Yesterday, the MPC noted that the impact of the further tightening of monetary policy in March to anchor inflationary expectations was still impacting the economy.

In view of these developments, the MPC decided to retain the Central Bank Rate (CBR) at 9.50 percent, it said.

"The Committee will closely monitor the impact of the policy measures, as well as developments in the global and domestic economy, and stands ready to take additional measures as necessary," Njoroge said.

It will meet again in July 2023, but remains ready to re-convene earlier if necessary, he said.

Meanwhile, the regulator says the banking sector remains stable and resilient, with strong liquidity and capital adequacy ratios.

The ratio of gross non-performing loans (NPLs) to gross loans stood at 14.6 per cent in April 2023, compared to 14.0 per cent in February.

Increases in NPLs were noted in the manufacturing, real estate, building and construction, and trade sectors.

"Banks have continued to make adequate provisions for the NPLs," it said.

Growth in private sector credit stood at 13.2 per cent in April 2023 compared to 11.7 per cent in February.

Strong credit growth was observed in the following sectors: Manufacturing (21.7 per cent), transport and communication (18.0 per cent), trade (13.7 per cent), and consumer durables (13.3 per cent).

The number of loan applications and approvals remained strong, reflecting increased demand.

The two surveys conducted ahead of the meeting, the CEOs Survey and Market Perceptions Survey, revealed improved optimism about business activity and economic growth prospects for the next 12 months.

The optimism was attributed to improved weather conditions, which are expected to support agricultural production, easing of inflation, and resilience of the private sector.

Respondents expressed concerns about the proposed increase in taxation, rise in electricity and fuel prices and the weakening of the Kenya shilling.

The Agriculture sector survey conducted in the first half of the month revealed that the price of key food items had declined.

Additionally, respondents expect the supply of most vegetables to increase in the coming months on account of the rains.

Respondents identified transport costs, high input costs, infestation by pests and unpredictable weather patterns, as the major factors constraining agricultural production.