8 November 2012

Kenya: New CBK Rate Raises Hope for Cheaper Loans

THE Central Bank renewed hopes for lower loan rates by cutting its key lending rate to 11 per cent from 13 per cent. CBK monetary policy committee made the decision yesterday on the back of falling inflation, stable exchange rate and improved economic conditions.

Overall inflation continued to decline in October falling to 4.14 per cent from 5.32 per cent the previous month. On the other hand, the exchange rate stability was sustained fluctuating within a range of Sh84.91 to Sh85.28 against the dollar in October, compared with a range of Sh84.14 to Sh85.28 in September.

In addition, the level of usable foreign exchange reserves held by the CBK rose to 4.14 months of import cover at the beginning of this month following the disbursement of Sh9.4 billion by the International Monetary Fund. This, the CBK said, provides a further cushion to the foreign exchange market.

"The committee...observed that monetary policy operations had ensured stability of short-term interest rates and the interbank market through effective liquidity management," governor Njuguna Ndung'u said in a statement.

The decision to cut the policy rate at which the CBK lends to banks as a lender of last resort will come as a big relief for borrowers. Normally, the rate decision signals to banks the direction that interest rates should take.

A cut should therefore normally translate into lower rates. Already, some commercial banks have reduced their lending rates following the CBR cut in the last meeting in September.

Standard Chartered Bank economist Razia Khan said the cut in the CBR was expected although a little less than the 250 basis points that the market was anticipating.

"Markets should take this decision in their stride, given that the consensus had expected it," Khan said in an email response. "Going forward we expect a more modest pace of easing, but the CBR is still likely to reach 9 per cent by March."

The committee noted that the impact of continued volatility in international oil prices, the spill-over effects of the slowdown in global economic growth on the domestic economy, and the balance of payments pressures emanating from a high current account deficit remain the main risks to the macroeconomic outlook. "Political risk will have to be closely watched," Khan cautioned.

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