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MPC reduces Lending Rate to 8.5%

Central Bank of Kenya’s Monetary Policy Committee (MPC) has reduced the Central Bank Rate (CBR) by 50 basis points to 8.5 per cent in a meeting on November 25, 2019.

The meeting was held against a backdrop of domestic macroeconomic stability, the recent repeal of interest rate caps, and heightened global uncertainties and volatility in international markets. Month-on-month overall inflation remained well anchored within the target range in September and October 2019, largely due to relatively stable food prices and lower cost of energy.

Strong receipts from transport and tourism services, resilient diaspora remittances and lower imports of food and SGR-related equipment helped stabilize foreign exchange market, supported by the narrowing current account deficit, which narrowed to 4.1 percent of GDP in the 12 months to September 2019 from 5.1 percent in September 2018. The bank says it expects the current account deficit to narrow to 4.3 percent of GDP in 2019 from 5.0 percent in 2018.

The CBK foreign exchange reserves, which currently stand at USD 8,794 million (5.5 months of import cover), continue to provide adequate cover and a buffer against short term shocks in the foreign exchange market.

Private sector credit grew by 6.6 percent in the 12 months to October, compared to 7.0 percent in September. This growth particularly to Micro, Small and Medium-sized Enterprises (MSMEs) is expected to increase due to the deployment of innovative credit products targeting the sector, and the repeal of interest rate caps.

The banking sector remains stable and resilient. Average commercial banks’ liquidity and capital adequacy ratios stood at 51.2 percent and 18.3 percent, respectively, in October. The ratio of gross non-performing loans (NPLs) to gross loans declined marginally to 12.3 percent in October from 12.6 percent in August. In particular, there were decreases in NPLs in the real estate, transport and communication, and building and construction sectors reflecting increasing repayments and the enhanced recovery efforts by banks.

MPC welcomes the repeal of rate cap, noting that they had led to a significant rationing of credit, particularly to the most vulnerable.

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