Kenya retains benchmark lending rate

Kenya retains benchmark lending rate

NAIROBI - The Central Bank of Kenya (CBK) on Wednesday retained the benchmark rate to 18 percent, in an attempt to ease inflation and allow policy measures which it recently introduced to deliver key results.

CBK Governor Njuguna Ndungu who chaired the Monetary Policy Committee (MPC) meeting on Wednesday, said the retention of the benchmark rate should slowdown private sector credit growth to help dampen demand-related inflation pressures.

"The Committee decided to retain the Central Bank Rate at 18.0 percent. This will allow time for the policy measures in place to work out and deliver decisive results on inflation and inflation expectations," Ndungu said in a statement issued in Nairobi.

The Committee noted that overall inflation continued to gradually decline for the second consecutive month, dropping from 18.93 percent in December 2011 to 18.31 percent in January.

This, the country's top monetary policy organ said, was mainly on account of easing food and fuel prices supported by the appreciation of the Kenya shilling, adding that the private sector credit growth declined in December 2011 in response to the tight monetary policy.

"Private sector credit growth has declined but needs to slow down further to dampen demand-related inflation pressures," the committee said.

The Committee observed that inflation is expected to continue to ease in the coming months on account of the current monetary policy stance, stability of the exchange rate, decline in oil prices, and continued easing of demand pressures with the slowdown in private sector credit growth.

"Furthermore, reduced credit to finance imports is expected to ease pressure on the exchange rate," MPC said.

The International Monetary Fund (IMF) on January 18 forecast that inflation will decline to 7 percent by 2012/13 from current projection of 16.2 percent in 2011/12.

Economic analysts say the IMF forecast is likely to improve Kenya's economic image as it prepares to arrange for a syndicated loan of 600 million U.S. dollars from several global banks in the next two weeks. The money is meant to cover the budget deficit.

The top monetary policy organ said the banking sector remains stable with a limited threat of loan defaults following the recent measures taken by the Kenya Bankers Association to cushion borrowers against high interest rates.

"The government's planned external commercial financing as part of its domestic borrowing requirement in the fiscal year 2011/12 is expected to dampen upward pressure on interest rates," MPC said.

"In addition, the continued coordination of fiscal and monetary policies will sustain the growth potential."

However, the apex bank said the geo-political risks associated with oil movement through the Strait of Hormuz could interrupt crude oil supply and affect fuel prices globally.

It also said a continued increase in Diaspora remittances signals confidence in the economy despite the recent external shocks.

The MPC observed that the balance of payment pressures and the persistent uncertainty in the global financial markets due to the debt crisis in the eurozone remain the main risks to the inflation outlook and exchange rate pressure.

It said a recent forecast of a dry spell in most parts of the east Africa nation by the Meteorological Department presents risks to agricultural production and food supply.