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Kenya’s Central Bank Cuts Key Rate to Lowest in Three Years

Updated on
  • MPC reduced its benchmark interest rate to 9.5% from 10%
  • Well-anchored inflation allows scope to support growth: MPC

Kenyan economic policy makers cut the central bank’s benchmark interest rate for the first time in 18 months as slowing inflation allows room to spur growth.

The Monetary Policy Committee cut its base rate by 50 basis point to 9.5 percent, the lowest level since May 2015. Only two of eight economists in a Bloomberg survey predicted the decision.

“The MPC noted than inflation expectations were well-anchored within the government target range, the increased optimism for growth prospects in the economy, and that economic output was below its potential level,” central bank Governor Patrick Njoroge said in an emailed statement on Monday. “It concluded that there was scope for easing its monetary policy stance in order to support economic activity.”

While geared toward reinvigorating credit growth, the cut could have the opposite effect with banks shunning borrowers because of an interest-rate cap introduced in 2016. Lenders are allowed to charge a maximum four percentage points above the prevailing central bank rate and are required to pay at least 70 percent of the base rate for deposits. The lower central bank rate reduces the ceiling from 14 percent to 13.5 percent, further discouraging banks from lending.

Treasury Secretary Henry Rotich said last week the law would be “abolished, amended or modified.’’

“Clearly, a rate cut could have a negative effect on credit availability for smaller borrowers in the near-term by making it more unattractive to lend to them versus larger companies or the government,’’ Bloomberg Economics’ Africa economist Mark Bohlund, who predicted the cut, said in an emailed response to questions before the announcement.

While the monetary policy committee indicated at its January meeting that there was room for accommodative monetary policy, many in the market expected any reduction only after authorities scrapped or revised the rate-cap law, according to Razia Khan, head of macroeconomic research at Standard Chartered Bank Plc.

“This was the correct move in our view, and given expectations that loan rate caps will be amended, we expect to see a moderately positive credit growth reaction in response,” Khan, who predicted a 50-basis-point cut, said in an emailed note. “In overall terms, this will help the Kenyan economy, as it embarks on a more consolidative fiscal path.”

The nation’s foreign reserves jumped to $8.83 billion from $7.09 billion in January, reflecting receipt of proceeds from a Eurobond issue last month, the central bank said. That stock, coupled with $989.8 million in a precautiounary International Monetary Fund facility, provides some buffer against exogenous shocks, according to the statement.

— With assistance by Simbarashe Gumbo

(Updates with analyst comment from seventh paragraph.)
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