The Central Bank of Kenya (CBK), which cut its rate by 150 basis points last year, also said it remains concerned about current uncertainties, including the impact of the government-imposed cap on lending and deposit rates by commercial banks on the effectiveness of monetary policy.
A preliminary analysis, which included a survey of commercial bank officers, showed the rate cap, which went into effect last September, would lead to an increase in demand for credit but actual credit granted would remain constant due to the tighter credit standards.
Also, a market perception survey from this month showed private sector respondents expect a decline of growth this year due to the current drought and a slowdown in private sector credit growth.
While growth of private sector credit has stabilized at 4.0 percent, the share of loans to corporates has risen relative to business and personal loans and the average maturity of loans has shifted to short-term lending.
Loan approvals have declined by 6 percent between December and February this year while lending to micro, small and medium enterprises has declined in value due to reduced lending by large and medium banks, the CBK said.
It added that banks were still adjusting their business models to ensure they remain competitive in the new environment in which lending and deposit rates have been capped at 4 percentage points above the CBK's key rate.
Kenya's inflation rate rose to 9.04 percent in February from 7.0 percent in January, almost entirely due to higher food prices, with food inflation up to 16.5 percent from 12.5 percent due to drought.
In contrast to 2014 and 2015, Kenya's shilling has remained stable in 2016 and this year, supported by a narrower current account deficit and resilient inflows from horticulture, tourism and remittances.
The shilling was trading at 102.8 to the U.S. dollar, steady from 102.2 at the start of the year, with the central bank's foreign exchange reserves up to US$7.762 billion from $6.963 billion at the end of January for import cover of 5.1 months.
The rise in reserves was largely to due inflows from government loans, which together with the $1.5 billion arrangement with the International Monetary Fund provides an "adequate" buffer against short-term economic shocks, the CBK said.
The Central Bank of Kenya issued the following statement by Patrick Njoroge, chairman of its monetary policy committee:
"The Monetary Policy Committee (MPC) met on March 27, 2017, to review the outcome of its policy decisions and recent economic developments. The meeting was held against a backdrop of a sharp increase in food prices due to the prevailing drought in some parts of the country, the continued depressed growth of private sector credit, and uncertainties in the global economy.
Month-on-month overall inflation rose to 9.0 percent in February from 7.0 percent in
January 2017, almost entirely due to increases in food prices. Inflation for all other
categories in the CPI basket was below 5 percent. Food inflation rose to 16.5 percent
in February from 12.5 percent in January, as a result of the drought conditions. The
main food items driving inflation in February were tomatoes, kales (sukuma wiki),
sugar, maize, oranges, cabbages, Irish potatoes, and milk. Food prices are expected to
remain elevated in March and April due to the dry weather conditions, but ease with
the long rains. The 3-month annualised non-food-non-fuel inflation remained
relatively stable, suggesting that demand pressures were muted.
The foreign exchange market has remained stable. This has been supported by a
narrower current account deficit mainly due to lower imports of petroleum products,
machinery and transport equipment. Additionally, inflows from horticulture, tourism,
and diaspora remittances are resilient.
The CBK’s foreign exchange reserves currently stand at USD7,762 million (5.1
months of import cover) compared to USD6,963 million (4.6 months of import cover)
at the end of January 2017. The increase is largely due to inflows of planned external
loans of the Government. These reserves, together with the Precautionary
Arrangements with the International Monetary Fund (IMF), equivalent to USD1.5
billion, continue to provide an adequate buffer against short-term shocks.
The banking sector remains resilient. Average commercial banks’ liquidity and
capital adequacy ratios stood at 43.2 percent and 19.7 percent respectively in
February 2017. However, the ratio of gross non-performing loans to gross loans
increased to 9.7 percent in February 2017, largely due to tighter credit standards and
slower credit growth.
The Committee noted that the slowdown in credit growth largely reflected sector
developments in trade, manufacturing, real estate, and private households, which
account for 60 percent of total credit to the private sector. The contribution of these
sectors to total credit growth declined gradually to 4.6 percentage points in February
2017, from 13.6 percentage points in July 2015. This was partly due to: a slowdown
in exports by the manufacturing sector, delays in registration of land titles and
building approvals, and, availability of alternative external financing for key private
The MPC reviewed preliminary analyses of the impact of the Banking (Amendment)
Act 2016 that was implemented in September 2016. While the growth of private sector
credit has stabilized at 4.0 percent, the share of loans to corporates has increased
relative to business and personal loans. The average maturity of loans has also shifted
to short term lending. The number of loan applications increased between September
and December 2016, but has stabilized to February 2017. However, loan approvals
declined by 6 percent between December 2016 and February 2017. Lending to Micro,
Small, and Medium Enterprises (MSMEs) has declined in value terms, reflected in
reduced lending by large and medium banks. A survey of commercial bank credit
officers indicates that their expectations are that while demand for credit would
increase with the interest rate caps, actual credit granted would remain constant as a
result of tighter credit standards. While these are the early indications of the impact of
the interest rate caps, banks are still adjusting their business models to ensure that they
remain competitive in the new environment.
The MPC Market Perception Survey conducted in March 2017 showed that private
sector respondents expect a decline of growth in 2017, on account of the prevailing
drought conditions and slowdown in private sector credit growth. However, the
respondents expect the ongoing public investment in infrastructure to continue to be
The outlook for global growth in 2017 remains uncertain largely due to the economic
policies of the new U.S. administration, the Brexit outcome, and the pace of
normalizing monetary policy in the advanced economies.
The Committee concluded that overall inflation is expected to remain outside the Government target range in the near term due to the elevated food prices, even as demand pressures remain subdued. The Committee remains concerned about the prevailing uncertainties, including the impact of the interest rate caps on the effectiveness of monetary policy. The MPC therefore decided to retain the Central Bank Rate (CBR) at 10.0 percent. The Committee will continue to closely monitor developments in the domestic and global economies, and stands ready to take additional measures as necessary."
- The Committee noted that the slowdown in credit growth largely reflected sector developments in trade, manufacturing, real estate, and private households, which account for 60 percent of total credit to the private sector. The contribution of these sectors to total credit growth declined gradually to 4.6 percentage points in February 2017, from 13.6 percentage points in July 2015. This was partly due to: a slowdown in exports by the manufacturing sector, delays in registration of land titles and building approvals, and, availability of alternative external financing for key private sector projects.