Bloomberg News

Kenya Cuts Key Rate for Fourth Time to Hasten Economic Recovery

January 10, 2013

Kenya’s central bank lowered its key lending rates for the fourth time since July as policy makers try to sustain an economic rebound with cheaper credit.

The Monetary Policy Committee cut the benchmark interest rate to 9.5 percent from 11 percent, the Nairobi-based Central Bank of Kenya said in an e-mailed statement. Nine of 10 economists surveyed by Bloomberg forecast reductions ranging between one percentage point and two percentage points, with the other predicting the rate would remain unchanged.

“The idea is to spur credit expansion because so far the financial institutions have been very reluctant to extend affordable credit to the private sector,” Ben Nyamweya, a director at Nairobi-based Isis Kenya Investment Managers, said in a phone interview before the decision was announced. “The central bank wants to help the economy pick up.”

Growth in East Africa’s largest economy slowed in the first two quarters of 2012, to 3.4 percent and 3.3 percent, raising pressure on the central bank to ease monetary policy to stoke domestic consumption. It reduced its key rate in July for the first time in 18 months to bolster the economy as inflation slowed. Expansion was 4.7 percent in the third quarter and the government forecasts the economy will grow by about 5 percent in 2013, from 4.5 percent last year.

Limited Scope

Commercial lenders have failed to match reductions to the key policy rate when extending credit to households and businesses, citing factors such as a lack of information on clients’ creditworthiness.

Average commercial bank lending rates have fallen to 18.7 percent from 20.2 percent in July. Inflation slowed to 3.2 percent in December, from 3.3 percent the previous month, below the country’s target of 5 percent in the 2012-2013 fiscal year.

The Kenyan currency’s depreciation against the dollar has limited scope for the central bank to further reduce borrowing costs, Angus Downie, Ecobank Transnational Inc.’s head of economic research, said in an e-mailed response to questions. Increased spending ahead of elections in March and the country’s “large” current account deficit are putting further pressure on the currency, he said.

The shilling closed at 86.60 a dollar yesterday, the lowest level since May 30, bringing its losses since mid-2012 to 3 percent, according to data compiled by Bloomberg.

To contact the reporter on this story: Sarah McGregor in Nairobi at smcgregor5@bloomberg.net

To contact the editor responsible for this story: Nasreen Seria at nseria@bloomberg.net


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