Kenya Holds Key Lending Rate to Balance Inflation, Economy Needs

The Central Bank of Kenya left its benchmark interest rate unchanged for a seventh consecutive meeting as it balances inflation and economic growth pressures.

The Monetary Policy Committee kept the key lending rate at 8.5 percent, according to a statement e-mailed today by the Nairobi-based central bank, a decision predicted by eight out of 10 economists and analysts in a Bloomberg survey. The rest forecast an increase of half a percentage point.

“The rise in overall inflation has slowed down” and consumer prices remain range-bound, according to the statement. “Confidence in the economy remains strong.”

Economic growth was sluggish in the first quarter at an annual 4.1 percent, unchanged from the previous three months, as tourists stayed away following advice from foreign governments against travel to Kenya amid increasing insecurity.

Almost 250 people have died in attacks countrywide since September when al-Qaeda-linked al-Shabaab militants stormed a mall in the capital, Nairobi, in retaliation for Kenya’s involvement in Somalia. Al-Shabaab is trying to oust the government in Somalia, bordering Kenya, and rule by Islamic law.

Inflation in Kenya accelerated to a seven-month high of 7.4 percent in June, nearing the ceiling of the government’s 2.5 percent to 7.5 percent target range.

The central bank for the first time set the Kenya Banks’ Reference Rate at 9.13 percent. It is being introduced as part of a new formula for commercial banks to price loans as the government seeks to reduce commercial lending rates.

Transparent Loans

The KBRR, which will be reviewed every six months, is the average of the benchmark interest rate and the 91-day Treasury bill rate. Lenders are also allowed to charge a premium for business costs and to account for the credit profile of the borrower. Introduction of the KBRR will help make the pricing of loans more transparent, the central bank said.

The average commercial bank lending rate was 17 percent in May, according to the central bank’s website.

Use of reference rate probably won’t result in lower loan charges, Kenya Bankers Association Vice Chairman Jeremy Ngunze said in an interview in Nairobi today.

“It may not immediately lead to a reduction of interest rates in the market,” he said. “It enables you, the consumer, to compare directly between bank A and bank B.”

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