Business and Finance

Kenya cuts lending rate to 16 per cent, warns economy still at risk

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Kenya has renewed its pressure on commercial banks to reduce lending rates by cutting the benchmark rate to 16.5 per cent, citing slowing inflation and currency stability.

The Central Bank of Kenya (CBK) on Thursday slashed the Central Bank Rate (CBR)—the rate at which the regulator lends to commercial banks—from 18 per cent while warning the country’s economy was still facing risks.

The cut should signal commercial banks to ease interest rates to borrowers.

The benchmark rate was held at 18 per cent for six consecutive months, since December 2011, when the shilling was volatile in trading to the dollar and inflation hit new highs.

But inflation has been easing in the past few months and the shilling has gained stability in trading to the dollar prompting the CBK to cut the rates.

Kenya’s inflation rate eased marginally to 10.05 per cent in June, from 12. 2 per cent in May, pulled down by falling food and fuel prices, the Kenya National Bureau of Statistics said last week.

But the CBK said Kenya’s economy was still threatened by external and internal factors.

“There are still potential threats and risks to both consumer prices and exchange rate stability which could increase inflationary pressure” said the CBK’s Monetary Policy Committee (MPC) after its latest meeting.

“The outlook for global economic growth has weakened in recent weeks as some of the risks around the eurozone crisis have materialised while the credibility of the relief packages is yet to be established.

“These developments continue to pose a risk to the demand for Kenya’s exports as well as foreign earnings from tourism, their receipts have traditionally supported the exchange rate” said the MPC in a statement.

Kenyan monetary officials, who have set 9 per cent as the short-term inflation rate target have been cautious on loosening the monetary policy too quickly, over fears that non-food-non-fuel inflation and the unstable shilling were potential risks to the inflation figures.

Analysts expect CBK to cut the rate further in the coming months. “The holding of the next MPC now opens the way for another outsize rate cut to follow, with the authorities granted additional time to gauge the impact on both the forex market and the wider economy,” said Razia Khan, Standard Chartered’s Head of Regional research, Africa.

“We expect market reaction to the rate cut to be overwhelmingly positive. With CPI having effectively fallen to 10 per cent there was plenty of room to cut the CBR, which was previously at a peak of 18 per cent, ” said Ms Khan adding the rate cut was a surprise to the markets.

With the CBK mopping up excess cash from banks, she said, the regulator is likely to remain well in control of the situation.


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