The indicative Central Bank Rate has been lowered to 9.50 per cent from 11 per cent setting the stage for further reduction in loans and mortgage charges.
The Monetary Policy Committee meeting yesterday cited improved economic environment for the significant drop which they hope will encourage reduction in commercial banks' lending rates and uptake of private sector credit.
"The government revised budget for 2012/13 financial year and the updated macroeconomic outlook is consistent with the growth and inflation forecasts in the monetary programme," the MPC statement said.
The committee said it will remain on high alert to monitor any risks in macroeconomic outlook through coming months and take appropriate actions. This is in light of the upcoming elections and the potentially disruptive activities seen in similar previous exercises.
"The monetary policy measures in place were considered adequate to ensure effective liquidity management and maintain stability in the interbank market in the coming months," the committee said.
According to the committee, the decision to reduce the CBR was mainly driven by declining inflation, the relatively stable exchange rates and consistent upward trend in economic growth.
Overall month-on-month inflation declined from 3.25 per cent in November 2012 to 3.20 per cent in December 2012, reflecting a continued decline in food prices and easing demand pressure in the economy. Non food and fuel inflation declined from 4.83 per cent to 4.81 per cent during the same period.
Exchange rate has remained stable since November, swinging within a range of Sh85.38 to Sh86.61 against the dollar. In the same period, the Central Bank foreign exchange reserves increased from $5,274.9 million, an equivalent of 4.14 months of import cover, at the beginning of November to $5,373.03 million or 4.15 months of import cover at the beginning of January 2013.
The number of loan applications increased by 32.5 per cent from 73,770 in October 2012 to 97,756 in November 2012. "CBK commentary suggests that the CBR was cut with a view to stimulating credit growth. Although the outlook for Kenya's economy remains relatively upbeat - election-related uncertainty aside - the need to provide further stimulus to the economy was clearly felt," said Razia Khan, head of Africa Research for Standard Chartered Bank.
The committee also noted that credit risk in the banking sector remained low, the ratio of gross non performing loans to total loans declined from 4.7 per cent in October 2012 to 4.6 per cent in November 2012.