CBK retains lending rate at 18 per cent though threats of exchange volatility remain

By Today Financial News Reporter

Interest rates on loans are expected to stabilise after the Central Bank of Kenya (CBK) retained its lending rate that determines interest charges at 18 per cent for the second month running.CBK Governor Prof Njuguna Ndung'u says exchange rate is stable but threats remain

CBK monetary policy committee (MPC) meeting Wednesday sent a signal that the tight stance taking over the last three months had started bearing fruits though there were still threats posed by the financial crisis in Europe.

“The tight monetary policy stance adopted by the committee has contributed to a decline in inflation with overall inflation declining from 19.72 percent in November 2011 to 18.93 percent in December 2011,” said the committee in a press statement.

“This positive signal was also supported by a fall in food and fuel prices and an appreciation of the exchange rate. In addition, private sector credit growth declined in November 2011 reflecting a continued easing of demand driven inflationary pressures.”

The statement released by Governor Prof Njuguna Ndung’u said information analysed by the committee showed that inflation is projected to ease further in early 2012.

“This outcome is a consequence of the monetary policy stance, the appreciation and stability of the exchange rate and the decline in oil prices,” he said.

“Furthermore, expected improvements in food supply will result in lower commodity prices.”

It also said the banking sector remains stable while analyses showed a positive response by the banks to the Kenya Bankers Association’s initiative to stem any threat of loan defaults.

“The committee noted that the Government’s request for an augmentation of the Extended Credit Facility programme was approved by the International Monetary Fund; this has boosted the CBK’s foreign exchange reserves position and generated improved confidence in the policy arena,” said the Governor.

“The recent re-affirming of Kenya’s credit rating at “B+ with a stable outlook” by the Standard and Poor’s rating agency is a reflection of confidence in the country as an investment destination. “

However, the committee said although inflation eased in December, balance of payments pressures and their potential impact on the exchange rate are major risks.

“In addition, the continued turbulence in the global financial markets due to the debt crisis in the Euro Zone presents a potential risk to the exchange rate and hence to inflation,” said the committee.

“Moreover, private sector credit growth must slow further to stem demand related inflation pressures. “