Kenya Cuts Key Rate by 1.5 Percentage Points to Drive Loans

Kenya’s central bank lowered its key lending rate for the fourth time since July, by a larger than expected 1.5 percentage points, as policy makers try to sustain an economic rebound with cheaper credit.

The Monetary Policy Committee cut the benchmark interest rate to 9.5 percent from 11 percent, the Nairobi-based Central Bank of Kenya said in an e-mailed statement. Seven out of 10 economists and analysts surveyed by Bloomberg forecast a one-percentage point reduction.

“It makes sense for them to encourage cheaper credit to help increase private sector activity and make the economy grow,” said Fred Moturi, a fixed-income trader at Nairobi-based Sterling Capital Ltd. and the only person surveyed by Bloomberg who correctly predicted the magnitude of the cut.

Growth in East Africa’s largest economy slowed in the first two quarters of 2012, to 3.4 percent and 3.3 percent, raising pressure on the central bank to ease monetary policy to stoke domestic consumption.

It reduced its key rate in July for the first time in 18 months to bolster the economy as inflation slowed. Expansion was 4.7 percent in the third quarter, boosted by agriculture and electricity, and the government forecasts the economy will grow by about 5 percent in 2013, from 4.5 percent last year.

The biggest risks to Kenya’s macroeconomic stability include fallout from the European financial turmoil and a “high” current account deficit, the central bank said.

Limited Scope

Commercial lenders have failed to match reductions to the key policy rate when extending credit to households and businesses, citing factors such as a lack of information on clients’ creditworthiness.

Average commercial bank lending rates have fallen to 18.7 percent from 20.2 percent in July. Further monetary easing may “increase uptake of private sector credit and realign interest rates,” according to today’s statement.

Inflation slowed to 3.2 percent in December, from 3.3 percent the previous month, below the country’s target of 5 percent in the 2012-2013 fiscal year.

The Kenyan currency’s depreciation against the dollar has limited scope for the central bank to further reduce borrowing costs, Angus Downie, Ecobank Transnational Inc.’s head of economic research, said in an e-mailed response to questions. Increased spending ahead of elections in March and the country’s “large” shortfall on the current account are putting further pressure on the currency, he said.

The current account deficit widened by 40.2 percent to $4.4 billion in the year to October 2012 from $3.1 billion the period earlier.

The shilling snapped a four-day losing streak and rose from a more than seven-month low, gaining less than 0.1 percent to 86.55 a dollar by 4:05 p.m. in Nairobi.

Before it's here, it's on the Bloomberg Terminal.