The Central Bank of Kenya (CBK) has lowered the policy lending rate, providing relief for many Kenyans seeking cheaper bank loans.
In its Monetary Policy Committee (MPC) meeting on Tuesday, August 6, the CBK reduced the base lending rate by 25 basis points, bringing it down to 12.75 percent from 13 percent.
The decision was attributed to a decline in inflation to comfortable levels, resilient economic growth, and improved global macroeconomic conditions.
“The Committee further noted that Non-food non- fuel (NFNF) inflation has moderated, while central banks in some major economies have lowered interest rates in response to easing inflationary pressures, with indications that other central banks will soon embark on a similar trajectory,” CBK said in a statement
“The MPC concluded that there was scope for a gradual easing of the monetary policy stance while ensuring continued exchange rate stability. Therefore, the Committee decided to lower the Central Bank Rate (CBR) to 12.75 percent.”
Why CBK Lowered Lending Rates
The drop in the policy rate is expected to reduce the cost of loans for domestic borrowers, many of whom have struggled to service their loans since the CBK began raising rates in June 2022.
CBR is the base for all monetary policy operations in order to enhance clarity and certainty in monetary policy implementation.
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The MPC noted that its previous measures have lowered overall inflation to below the mid-point of the target range, stabilized the exchange rate, and anchored inflationary expectations.
Kenya’s overall inflation declined to 4.3 percent in July 2024 from 4.6 percent in June, thereby remaining below the mid-point of the target range.
Food inflation remained stable at 5.6 percent in June and July, with declines in prices of key non-vegetable food items, particularly maize, sugar, and wheat flour, offsetting increases in prices of select vegetables, particularly tomatoes, Irish potatoes, and cabbages.
Fuel inflation declined to 4.5 percent in July from 6.4 percent in June, due to a downward adjustment in pump prices and lower electricity prices.
Other Changes in Growth
Non-food non- fuel (NFNF) inflation decreased to 3.3 percent in July from 3.4 percent in June, reflecting the impact of monetary policy measures.
Overall inflation is expected to remain below the mid- point of the target range in the near term, supported by a stable exchange rate, lower food prices with expected harvests, and stable fuel prices.
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The banking sector remained stable and resilient, with strong liquidity and capital adequacy ratios. The ratio of gross non-performing loans (NPLs) to gross loans stood at 16.3 percent in June 2024 compared to 16.1 percent in April.
Also, the recently released Gross Domestic Product (GDP) data for the first quarter of 2024 showed continued resilient performance of the Kenyan economy, with real GDP growing by 5.0 percent.
This reflected continued strong performance in agriculture attributed to favourable weather conditions, and robust performance of the services sector, particularly wholesale and retail trade, accommodation and food services, financial and insurance, information and communication, and real estate.
Growth in commercial bank lending to the private sector stood at 4.0 percent in June 2024 compared to 4.5 percent in May, partly reflecting exchange rate valuation effects on foreign currency denominated loans following the appreciation of the Shilling.
Meanwhile, the growth of the economy is expected to remain resilient in 2024 and is projected at 5.4 percent in 2024 from 5.6 percent in 2023. This is supported by robust services, sustained performance in agriculture, and improved exports. However, this outlook is subject to risks including geopolitical tensions.
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