Monday, November 25, 2019

Kenya cuts rate 50 bps after interest rate cap is scrapped

    Kenya's central bank lowered its benchmark interest rate only weeks after a controversial limit on commercial banks' interest rates was scrapped, saying inflation expectations remain well anchored, the economy is operating below its potential level, and the continuing tightening of fiscal policy has made room for an accommodative monetary policy to support economic activity.
    The Central Bank of Kenya (CBK) cut its Central Bank Rate (CBR) by 50 basis points to 8.50 percent and has now cut it by 300 basis points since it embarked on an easing cycle in May 2016.
    But since July 2018 the monetary easing has been paused against a backdrop of an impaired transmission of CBK's monetary policy after the government imposed a cap on commercial banks' interest rates in September 2016, arguing lenders were not passing on the falling interest rates to borrowers.
     But the rate cap, which was opposed by the International Monetary Fund (IMF) and found to have stifled lending growth and reduced the effectiveness of monetary policy, was annulled by the Nairobi High Court in March and scrapped earlier this month after Kenya's parliament approved President Uhuru Kenyatta's proposal.
     CBK said its monetary policy committee "welcomed" the repeal of the interest rate cap, adding this had led to "a significant rationing of credit, particularly to the most vulnerable," and removing it should "restore the clarity of monetary policy decisions and strengthen the transmission of monetary policy."
     In September CBK Governor Patrick Njoroge said there was scope to loosen its policy if the government sustains its efforts to reduce the budget deficit and earlier this month he then told Reuters the lifting of the cap on banks' lending rates had removed one of the concerns the bank had about cutting interest rates.
     The finance ministry has targeted a fiscal deficit in the current fiscal year of July 2019 - June 2020 year of 5.9 percent, down from 7.6 percent in 2018/19.
     After rising to almost 12 percent in May 2017, Kenya's inflation rate has decelerated and remains within the central bank's target range of 5.0 percent, plus/minus 2.50 percentage points.
     In October inflation rose to 4.95 percent from 3.83 percent, mainly due to temporary rise in maize grain and sifted flour while non-food inflation remains below 5 percent, "indicative of muted demand pressures and limited spillover effects of the excise tax indexation in July," CBK said.
     It added another adjustment in excise taxes in November are expected to have only a marginal impact on inflation, which is expected to remain within the target range in the near term.
     Kenya's shilling, which has been more stable in recent years after plunging in 2015, fell in the first part of the year but since early October it has bounced back.
     Following the rate cut, the shilling dropped 0.45 percent to trade at 102.06 to the U.S. dollar,  up 1.7 percent since October 1 but marginally down since the start of this year.
     "The foreign exchange market has remained stable, supported by the narrowing current account deficit and increased portfolio and other investment inflows," CBK said, adding the current account deficit had narrowed to 4.1 percent of gross domestic product in the 12 months to September from 5.1 percent in September 2018 and is expected to narrow to 4.3 percent of GDP in 2019 from 5.0 percent in 2018.
     Despite a hit to agricultural production in the first half of the year from a delayed onset and below average rain fall, CBK said the economy was resilient and GDP grew 5.6 percent in the first half and leading indicators suggest stronger growth in the second half, helped by growth in private sector credit to micro, small and medium-sized enterprises due to the deployment of innovative credit products and the repeal of the interest rate caps.

          The Central Bank of Kenya issued the following statement:

"The Monetary Policy Committee (MPC) met on November 25, 2019, to review the outcome of its previous policy decisions and recent economic developments. The meeting was held against a backdrop of domestic macroeconomic stability, the recent repeal of interest rate caps, and heightened global uncertainties and volatility in international markets.
  •   Month-on-month overall inflation remained well anchored within the target range in September and October 2019, largely due to relatively stable food prices and lower cost of energy. The inflation rate stood at 4.9 percent in October compared to 3.8 percent in September, mainly reflecting temporary effects of increases in the prices of maize grain and sifted flour. Non-food-non-fuel (NFNF) inflation remained below 5 percent, indicative of muted demand pressures and limited spillover effects of the excise tax indexation in July. Overall inflation is expected to remain within the target range in the near term due to lower food prices following improved weather conditions, and lower electricity prices. The November excise tax adjustments in the Finance Act 2019 are expected to only have a marginal impact on inflation.
  •   The foreign exchange market has remained stable, supported by the narrowing current account deficit and increased portfolio and other investment inflows. The current account deficit narrowed to 4.1 percent of GDP in the 12 months to September 2019 from 5.1 percent in September 2018. This largely reflected strong receipts from transport and tourism services, resilient diaspora remittances and lower imports of food and SGR-related equipment. The current account deficit is expected to narrow to 4.3 percent of GDP in 2019 from 5.0 percent in 2018.
  •   The CBK foreign exchange reserves, which currently stand at USD8,794 million (5.5 months of import cover), continue to provide adequate cover and a buffer against short- term shocks in the foreign exchange market.
  •   Private sector credit grew by 6.6 percent in the 12 months to October, compared to 7.0 percent in September. Strong growth in credit to the private sector was observed in the following sectors: trade (8.5 percent); finance and insurance (15.1 percent); consumer durables (28.6 percent); and private households (6.9 percent). Growth in private sector credit particularly to Micro, Small and Medium-sized Enterprises (MSMEs) is expected to increase due to the deployment of innovative credit products targeting the sector, and the repeal of interest rate caps.
  •   The banking sector remains stable and resilient. Average commercial banks’ liquidity and capital adequacy ratios stood at 51.2 percent and 18.3 percent, respectively, in October. The ratio of gross non-performing loans (NPLs) to gross loans declined marginally to 12.3 percent in October from 12.6 percent in August. In particular, there were decreases in NPLs in the real estate, transport and communication, and building and construction
    sectors reflecting increasing repayments and the enhanced recovery efforts by banks.
    •   The Committee welcomed the repeal of the interest rate caps on commercial bank loans,
      noting that they had led to a significant rationing of credit, particularly to the most vulnerable. It noted that this reform should restore the clarity of monetary policy decisions and strengthen the transmission of monetary policy. Further, banks have adopted the Banking Sector Charter, which defines a commitment to entrench a responsible and disciplined banking sector which is cognizant of, and responsive to, the needs of their customers.
    •   The economy remained resilient in the first half of 2019 despite the slowdown in agricultural production following the delayed onset and below average rainfall. Real GDP grew by 5.6 percent in the first half of 2019 supported by the non-agriculture sector particularly services. Leading indicators of economic activity suggest stronger growth in the second half of 2019, supported by agricultural production, growth of MSMEs, implementation of the Big 4 agenda, foreign direct investment and a stable macroeconomic environment.
    •   The MPC Private Sector Market Perception Survey conducted in November 2019 indicates that inflation expectations remain well anchored, mainly due to lower food prices following improved weather conditions. Respondents remained optimistic on economic prospects due to, among other factors, improved weather conditions, payments of pending bills by the government, growth in tourism, the expected increase in lending to MSMEs following the repeal of interest rate caps, implementation of the Big 4 agenda projects, ongoing public infrastructure investments, and a stable macroeconomic environment. Nevertheless, the optimism is moderated by concerns about the delay in the clearance of pending bills, reduced demand of some products, and the slowdown in global growth.
    •   Global growth has weakened further in 2019, largely due to continued uncertainties with regard to the trade tensions between the U.S. and China, other geopolitical developments and the uncertainties about Brexit. Central banks in major advanced economies have continued to implement more accommodative monetary policy to support growth and financial stability. The risk of increased volatility in the global financial markets remains high.
      The MPC noted that inflation expectations remained well anchored within the target range, and assessed that the economy was operating below its potential level. Furthermore, the Committee noted the ongoing tightening of fiscal policy and concluded there was room for accommodative monetary policy to support economic activity. The MPC therefore decided to lower the Central Bank Rate (CBR) to 8.50 percent from 9.00 percent. The Committee will closely monitor the impact of this change in its policy stance.
      The MPC will continue to closely monitor developments in the global and domestic economy, and stands ready to take additional measures as necessary."

      www.CentralBankNews.info

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