This archive report was first published on 26 November 2019.
On November 25, 2019, the Central Bank of Kenya (CBK) made a significant move by cutting its base lending rate to 8.5 percent from 9 percent, marking the first adjustment to the Central Bank Rate (CBR) in 15 months.
This decision is expected to bring relief to holders of loans taken during the rate cap environment, as the effective charged interest rate will come down by 0.5 percent.
The CBK attributed its decision to the need to lift economic growth, citing that inflation expectations remained well anchored within the target range, and the economy was operating below its potential.
According to the CBK, the Monetary Policy Committee (MPC) noted that there was room for accommodating monetary policy to support economic activity, and the downward revision largely fits the expectations of investments analysts who hoped for a cut to aid in the recovery of economic growth for the remainder of the year.
Researchers from Cytonn Investments noted that a further cut will be necessary to provide the required economic growth stimulus, further boosted by the repeal of the interest rate cap, which is expected to provide more efficient transmission of monetary policy.
The rate cut is widely supported by a stable inflation, which came in at five percent in October and well within the prescribed range of 2.5 to 7.5 percent against intermittent fluctuations in food prices.
Further, the lowering of the lending base by the CBK is backed by the narrowing of the current account balance, which shrunk to 4.1 percent in September from 5.1 percent year over year on the back of improved transport & tourism earnings and lowered imports on food and SGR related equipment.
At the same time, CBK usable foreign exchange reserves have remained resilient at Ksh.891.4 billion ($8.8 billion) or an equivalent 5.5 equivalent month import cover.
