Kenyans will now access loans at cheaper rates after Central Bank’s Monetary Policy Committee lowered the lending rate by 50 basis points to 9 per cent from 9.50 per cent.
This means the maximum interest rate banks will charge on loans drops to 13 per cent from the previous 13.5 per cent set in March in line with the interest rate cap law.
Normally, banks are not allowed by law to charge more than 4 per cent interest above Central Banks lending rate.
"The MPC noted that inflation expectations were well anchored within the target range, and that economic growth prospects were improving," CBK Governor Patrick Njoroge said on Monday.
"Furthermore, economic output was below its potential level, and there was some room for further accommodative monetary policy," Njoroge, who also chairs the MPC added.
The CBK boss, however, noted that CBK’s decision to lower the CBR to 9.50 percent in March had little impact on key macroeconomic variables such as
credit and economic growth.
The effect of this saw the credit growth in the Private sector in the month of April grow by only 2.8 per cent compared to 4.3 per cent growth overt a 12 month period ending June 2018.
Credit to the manufacturing, building and construction, and trade sectors grew by 12.3 per cent, 13.5 per cent, and 8.6 per cent, respectively, Njoroge said.
"The MPC will closely monitor the impact of this change in its policy stance. Other developments in the domestic and global economy will also be observed, and the MPC stands ready to take additional measures as necessary."
Njoroge noted that overall inflation is expected to remain within target due to lower food prices even as high fuel prices and excise duty on some goods is expected to exert inflationary pressure in the near term.
The CBK boss said the inflation rate in June stood at 4.3 per cent compared to 4.0 per cent in May due to the recent increase in energy prices.
He said demand-driven inflationary pressures are muted as non-food-non-fuel (NFNF) inflation remained below 5 per cent.
"Nevertheless, overall inflation is expected to remain within the target range mainly due to expectations of lower food prices reflecting favourable weather conditions," Njoroge said.
He said the current account deficit narrowed to 5.8 per cent in the 12 months to June 2018 from 6.3 per cent in March 2018.
This, he said, is expected to narrow further to 5.4 per cent of GDP boosted mainly by tea and horticulture exports and steady diaspora remittances and improved tourists’ arrivals.
Njoroge said expenditure on fuel imports is expected to rise due to higher international oil prices but this will be cushioned by lower food imports and SGR-related equipment thereby moderating the impact on the current account.
The CBK boss further said the country has enough foreign reserve to last for close to six months (Sh8.8 billion).
"The precautionary arrangement with the International Monetary Fund equivalent to USD989.8 million, provides an additional buffer against exogenous shocks," he said.
Real GDP grew by 5.7 per cent compared to 4.8 per cent in the first quarter of 2017 mainly due to a strong recovery in agricultural activities as a result of improved weather conditions.
Njoroge said the growth was further accentuated by the recovery of the manufacturing sector and a resilient performance by the wholesale and retail trade, real estate, and tourism.
He said the GDP is expected to strengthen further boosted by the above sectors, a stable macroeconomic environment and government’s spending on the Big 4 aligned priority sectors of manufacturing, agriculture, universal health and cheap housing.