Central Bank’s Monetary Policy Committee yesterday cut its key lending rate by 100 basis points to 10.5 per cent, giving borrowers hopes of cheaper loans in the short-term.
MPC chairman, governor Patrick Njoroge, cited slowing inflation rates, stable interest rates and foreign exchange rates, and rising foreign exchange reserves, in lowering the Central Bank Rate for the first time since July 9.
“The committee noted that overall inflation is expected to decline and remain within the government target ( 2.5 to 7.5 per cent) range in the short-term. Therefore, it concluded that there was policy space for an easing of monetary policy while continuing to anchor inflation expectations,” Njoroge said in a statement.
Inflation last month dropped to 5.3 per cent from 6.5 per cent, while the shilling has appreciated by about 0.66 per cent to the US dollar since MPC’s last meeting on March 21. The currency has been helped by lower value of oil imports, increased agricultural and horticultural exports’ earnings, and rising diaspora remittances.
The CBK’s stock of dollars has also gone to $7.69 billion – an equivalent to five months of import cover against the target of four months’ cover – from $7.38 billion (4.7 months of import cover) supported by the narrowing difference between value of imports and exports. Njoroge said the current account deficit, as this is technically known, was likely to narrow further this year from 6.8 per cent in 2015, which was a three percentage point decline compared with 2014.
“These reserves, together with the () precautionary arrangements with the International Monetary Fund will continue to provide adequate buffers against short-term shocks,” Njoroge said. “The coordination between monetary and fiscal policies continues to support macroeconomic stability.”
The drop in budget deficit this financial year– meaning reduced borrowing by government– will ease pressure on interest rates, he added.
The banking industry which was hard-hit by a run on deposits in about 33 lenders following closure of mid-tier Chase Bank on April 7, he said, has started stabilising after Chase was re-opened under KCB management on April 27.
“Furthermore, the CBK’s enforcement of existing regulations particularly with respect to the classification of loans, has strengthened and increased transparency of the banking sector,” Njoroge said. “The ratio of gross non-performing loans to gross loans was 8.2 per cent in April 2016, partly reflecting better reporting standards.”