The Central Bank of Kenya‘s Monetary Policy Committee (MPC) has reduced the Central Bank Rate by 2 percentage points to 11% down from 13%. The Committee has noted that a tighter monetary policy stance has continued to deliver the desired results of a decline in inflation and exchange rate stability. The announcement is welcome news for borrowers as banks are expected to lower interest rates they charge on loans since commercial banks peg their lending rates on the CBR.
In July, the MPC lowered the base lending rate by 150 points to 16.5% down from 18% a rate sustained since December 2011. The MPC said all economic indicators pointed towards a stabilizing economy hence the move to lower the lending rate. The committee cut the rate to 13% in the September sitting signaling banks to slightly lower their rates bringing the average base lending rate to 20% down from 22% in October.
The Committee observed that overall inflation continued to decline in October 2012 and was within the 5% target set by the Government for the fiscal year 2012/13. The overall month-on-month inflation declined from 6.09% in August 2012 to 5.32% in September 2012 and further to 4.14% in October 2012. According to MPC, the decline in inflation was reflected across all the measures of inflation as well as all income groups. Declining food prices – despite increases in fuel prices – coupled with easing demand pressures in the economy continued to support the decline in inflation.
The MPC also noted that Exchange rate stability was sustained fluctuating within a narrower range of KES 84.91 to KES 85.28 against the US Dollar in October 2012, compared with a range of KES 84.14 to KES 85.28 in September 2012.
The committee says that the banking sector remained strong and stable with 2012 half year performance of commercial banks proving stability of the sector. Commercial banks’ lending rates had also declined slightly following the Committee’s decisions to lower the policy rate during its last two meetings. The banks are expected to lower their rates below the 20% average they hold as at October.