The Central Bank Kenya 's Monetary Policy Committee has today announced a base lending rate of 150 basis points to 9.5% from the 11% rate set in November.In a statement from the MPC noted that its policy stance continued to contribute to a declining inflation and exchange rate stability as well as achieve the targets in the monetary programme.
The Committee said the decision to cut the rate was informed by a decline in the overall month-on-month inflation to 3.20% in December 2012 from 3.25% in November 2012 , reflecting a continued decline in food prices and easing demand pressure in the economy.
The MPC says the exchange rate has remained stable since the last meeting in November fluctuating within a range of KES 85.38 to KES 86.61 against the US Dollar. All these coupled with a stabilizing economy and a well performing banking and finance sector informed the Central Bank to reduce the key rate.
However, it noted that the main risks to macroeconomic stability were the uncertainty over the full resolution of the eurozone problems and balance of payments pressures attributed to the high current account deficit. It noted, however, that 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.
Commercial banks are expected to follow the MPC's move to cut their lending rates and transfer the benefit of cheaper credit to borrowers. Most commercial banks still have high lending rates averaging 19%. Treasury has lamented before on the banks action of lowering their rates reluctantly each time the MPC lowers the Central Bank Rate (CBR).
With the single digit CBR, the market will expect average lending rates of 14%-16% in the next 2 months. However, this does not seem probable with most banks' base lending rates at 20%.
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