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CBK retains lending rate at 8.6 pct

10 July 2013, 16:01

Nairobi - Kenya's Central Bank (CBK) on Tuesday retained the benchmark lending rate (CB Rate) at 8.50 percent to manage price stability and risks to the macroeconomic outlook.

A statement issued after the CBK's Monetary Police Committee (MPC) meeting in Nairobi said confidence in the economy has been sustained.

"The Committee will continue to monitor the outcomes on the key macroeconomic aggregates, implementation of the new fiscal program as well as any emergent risks to ensure that the policy stance continues to deliver price stability," Njuguna said in a statement.

The latest World Bank County Policy and Institutional Assessment rating places Kenya as one of the two top countries in sub-Saharan Africa.

In addition, the MPC, the bank's top decision making body, said Diaspora remittances increased from 105 million U. S. dollars in April to 110 million dollars in May.

According to the MPC Market Perceptions Survey conducted in June, the private sector expects inflation and the exchange rate to remain stable on the remainder of the year, and sustained optimism for a strong recovery in growth in 2013.

However, CBK Governor Professor Njuguna Ndung'u said despite the developments in the monetary policy stance, there remain risks to the macroeconomic outlook.

"These risks emanate mainly from the high current account deficit, and the current instability in the Middle East and North Africa (MENA) and Eurozone which are a threat to the general stability of prices," Njuguna said.

He said the previous experience had shown that disturbances in the MENA region could affect the prices of oil and tea exports which could have balance of payments and inflation implications.

Kenya's inflation has remained within the medium-term target set by the government while the exchange rate is stable.

The MPC met on Tuesday to consider the implications of the budget policy statement for the fiscal year 2013/14 on monetary policy and noted that the government's domestic borrowing target of 1.24 billion dollars for this financial year was slightly below the 1.93 billion dollars for the previous fiscal year.

"This borrowing, coupled with the planned issuance of a Sovereign Bond during the fiscal year, should ensure that domestic borrowing does not exert pressure on interest rates on government securities," Njuguna said.

Both overall and non-food-non-fuel month-on-month inflation rates remained within the allowable margin of 2.5 percent on either side of the government's medium-term target of 5 percent.

Overall month-on-month inflation increased from 4.05 percent in May to 4.91 percent in June reflecting an increase in the consumer price index in mid-2012.

According to CBK, non-food-non-fuel inflation, which measures the impact of monetary policy, however declined from 3.91 percent to 3.86 percent during the period.

"This reflects reduced demand pressure in the economy. In addition, the three-month annualized overall and non-food-non-fuel inflation rates declined from 8.87 percent to 4.81 percent and from 4.69 percent to 3.48 percent, respectively, in the period," Njuguna said.

The CBK governor said these developments suggest no significant immediate underlying inflation pressure, noting that the declining international oil prices coupled with non-inflationary credit growth support a low and stable short-term outlook for inflation.

Data on the banking sector and the stress tests conducted on commercial banks indicate that the sector remains solvent and resilient with gross loans increasing by 1.6 percent from 16.5 billion dollars in April to 16.7 billion dollars in May.

According to the Kenya National Bureau of Statistics, the economy registered a strong growth rate of 5.2 percent in the first quarter of 2013.

This mainly reflected the current macroeconomic stability characterized by a low and stable inflation rate and a stable exchange rate and a strong performance of the agricultural sector which grew by 8.3 percent compared to 2.1 percent in the first quarter of 2012.

The MPC said the gradual easing of the monetary policy stance it adopted coupled with sustained open market operations has resulted in improved liquidity conditions and stability in the interbank market.

"Consistent with the monetary police stance, commercial banks' average lending interests continued on a gradual downward trend in April and May," the governor said.


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