Kenyan Central Bank Reduces Benchmark Interest Rate After Inflation Slowed

Kenya’s central bank unexpectedly cut its benchmark interest rate by 0.75 percentage points, bringing further pressure to bear on the country’s commercial lenders to make even deeper reductions to their lending rates.

The Monetary Policy Committee reduced the rate to 6 percent, the Nairobi-based Central Bank of Kenya said today in an e-mailed statement. Three of the four economists surveyed by Bloomberg News forecast the bank would leave the rate unchanged for the third time this year. David Cowan, Citigroup’s Africa economist, predicted a reduction of between half a percentage point and one percentage point.

“This is a shock-therapy cut and it caught everyone off guard,” Aly-Khan Satchu, an independent Nairobi-based financial analyst, said by phone today. “They’re trying to push commercial banks to a tipping point.”

The central bank has reduced its lending rate six times since 2009 to help spur economic growth and boost the expansion of credit to businesses and households. The benchmark rate is now at its lowest level since it was introduced on June 2, 2006.

Previous reductions in borrowing costs have failed to prompt commercial banks to lower their average lending rates, which fell to 14.39 percent in June from 15.1 percent a year earlier, according to data on the central bank’s website. Lenders in Kenya say that credit is expensive because loan default rates are high. Even so, domestic credit grew 26.6 percent in the year to June and non-performing loans declined, according to the statement released by the central bank today.

‘Upside Risks Low’

The “upside risks” to inflation are low, the central bank said.

Annual inflation in Kenya slowed to 3.2 percent in June, compared with 5.3 percent in December, according to data on the website of the Nairobi-based National Bureau of Statistics. The government’s inflation target is five percent.

The government’s economic growth forecast of between 4 percent and 5 percent this year in East Africa’s biggest economy is “conservative” because of rising investment in agriculture and infrastructure, central bank Governor Njuguna Ndung’u said on July 20, according to a speech on the bank’s website. Growth was 2.6 percent last year.

There are indications that the 4.4 economic growth rate registered in the first three months of the year will be “comparable” in the second quarter, the bank said today.

To contact the reporter on this story: Sarah McGregor in Nairobi at  smcgregor5@bloomberg.net.

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