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Kenya's Central Bank Adds to Pressure on Lenders to Lower Lending Rates
Kenya’s commercial banks, which are reporting higher earnings and fewer defaults, should pass on lower interbank lending rates to their clients to help sustain rising economic growth, the country’s central bank said.
The Central Bank of Kenya’s decision to cut its benchmark rate by 0.75 percentage point to 6 percent on July 28 sent a “strong signal” that lenders should slash the cost of borrowing, Governor Njuguna Ndung’u said in an e-mailed statement today.
Lending growth needs to accelerate to maintain expansion in East Africa’s largest economy, Ndung’u told reporters in the capital, Nairobi, today. The bank has reduced its key lending rate six times since 2009 to help spur growth and boost the expansion of credit. The rate is at its lowest since the central bank began setting it on June 2, 2006.
“Growth is no longer fragile,” Ndung’u said. “Economic recovery is on course with increased optimism for enhanced growth in 2010 hence the need for banks to increase credit to the private sector.”
The average lending rate fell to 14.39 percent in June from 14.58 percent in April, Ndung’u said.
Domestic bank credit grew 27 percent in the year through June and non-performing loans declined, the central bank said in a statement on July 28. Forty-one percent of Kenyan banks expect to increase credit by 10 percent over the rest of 2010, he said, citing surveys of bankers and businesspeople done in July.
Subdued Inflation
Annual inflation was little changed at 3.6 percent in July, compared with a revised 3.5 percent the month before, following good rains that ended a drought and boosted crop output, the central bank said in today’s statement.
Inflation is expected to remain subdued as fuel prices have stabilized and there is good domestic production of rain-fed foods, the bank said. The target inflation rate is 5 percent.
About 17 percent of respondents in a central bank survey of businesses expect the economy to grow faster than the 5 percent forecast by the government for this year, the central bank said.
Faster growth is boosting bank earnings. Equity Bank Ltd., Kenya’s biggest lender by customers, said on July 20 that net income in the six months to June 30 jumped to 3.01 billion shillings from 2.09 billion shillings a year ago. One week earlier, Kenya Commercial Bank Ltd. said profit for the first fiscal half through June advanced 21 percent.
Economic growth of 4.4 percent in the first quarter was driven by agriculture, which posted its first increase in output since 2007, manufacturing, which expanded the most in a decade, and tourism, the central bank said today. It forecasts a similar pace of growth in the second quarter.
Kenya’s economy grew 2.6 percent last year, up from 1.7 percent in 2008.
To contact the reporter on this story: Sarah McGregor in Nairobi at smcgregor5@bloomberg.net
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