Kenya c-bank leaves benchmark rate on hold at 8.5%, sets KBRR at 9.13%

By bne IntelliNews July 8, 2014

The Monetary Policy Committee (MPC) of Kenya’s central bank decided on Tuesday (July 8) to leave the central bank rate (CBR) unchanged at 8.5% in order to continue anchoring inflationary expectations and sustain price stability.

The MPC noted that the annual inflation rate edged up to 7.39% in June from 7.3% the month before, but remained within the medium-term target range of 5% plus or minus 2.5pps. Moreover, it said, the growth in overall inflation has slowed down, indicating that the monetary policy has continued to deliver the desired price stability.

The MPC said also that the exchange rate has remained generally stable, despite recent seasonal pressures attributed mainly to corporate dividend payments. The shilling was underpinned mainly by diaspora remittances and increased foreign investor participation in the Nairobi Securities Exchange (NSE). The central bank’s usable foreign exchange reserves stood at USD 6.5bn as of July 7, equivalent to 4.34months of import cover, providing a cushion for the exchange rate against temporary shocks.

The MPC stated also that the proceeds from the country’s USD 2bn debut Eurobond, sold last month, should reduce the pressure on government borrowing and interest rates, as well as help for the further build-up of foreign exchange reserves.

The MPC noted also that the banking sector remains solvent and resilient, according to the latest stress tests data. The y/y growth in credit to the private sector accelerated to 25% in May from 23.9% in April, with an increased focus on the productive sectors pf the economy. The banking system’s non-performing loan (NPL) ratio fell to 5.6% in May from 5.7% in April.

Kenya’s gross domestic product (GDP) grew by 4.1% y/y in Q1 2014, slowing from a 5.2% expansion in the same period last year, due to insecurity concerns that hit the hotel and restaurant sector and an erratic weather pattern that resulted in depressed agricultural output.

The central bank also set the newly launched Kenya Banks’ Reference Rate (KBRR) at 9.13%. The KBRR level will be reviewed in January. Commercial banks will have to price their loans based on the KBRR plus a premium that may depend on factors such as the banks’ cost of doing business, the borrower’s credit profile and credit type. The KBRR is part of a number of measures, adopted by the Treasury, to reduce commercial banks’ interest rates on loans to businesses and households in a bid to boost private sector credit and mortgage finance in the country.

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