27 July 2011

Kenya: Central Bank Maintains Key Lending Rate to Counter Inflation

The Central Bank of Kenya has kept its key lending rate unchanged at 6.25 basis points, after two increases this year, as Commercial banks continue increasing their lending rates. In a statement, the bank's Monetary Policy Committee (MPC) said a tight monetary policy stance would not achieve the desired results if the supply sides of food, fuel and energy were not effectively addressed.

From its own survey, the committee noted that tightening the monetary stance would have been counter-productive as commercial banks would have followed suit in increasing lending charges.

Already in the past few weeks, a number of banks have increased their lending rates, in line with CBK's two increases in its rate, even as CBK Governor Prof Njuguna Ndung'u and President Mwai Kibaki appealed to them to lower their lending charges to help growth.

According to CBK data, lending rates currently average 13.9 per cent, while banks pay savers 1.38 per cent on their deposits.

In order to facilitate commercial banks liquidity management, the Committee decided that commercial banks will be required to maintain cash reserve ratio based on a weekly average instead of the current daily average.

"The Committee was concerned with the persistent inflationary pressures and exchange rate volatility driven by the further supply constraints and heightened expectations," said the statement.

MPC said that exchange rates and interest rates volatility in the recent past had necessitated the need for policy actions to improve commercial banks' liquidity management and close loopholes for arbitrage that have perverse outcomes.

It said the direction and volatility of the exchange rate in the recent times was not supported by fundamentals, and foreign exchange reserves continued to lie within the target range while the fiscal deficit continued to support macroeconomic stability.

In June, the CBK raised its CBR by 0.25 per cent to 6.25 per cent from the previous six per cent hallmarked by a bid to contain spiraling inflation. This was soon followed by commercial banks adjusting their interest rate charges in equal measure.The CBR is an indicator of the rate at which local banks lend money to customers and usually dictates the cost of commodity prices locally.

Kenyan inflation, driven by higher food and fuel costs, accelerated for the eighth straight month in June to 14.5 per cent, dampening personal and corporate spending.

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