The decision by the Central Bank of Kenya (CBK) to cut the benchmark rate will take time to have the desired results.
According to the World Bank’s new report, the monetary policy which saw the Central Bank Rate (CBR) lowered by 0.5 percentage points will take longer to counter the effects of Treasury’s austerity measures.
The reduction was meant to open the tap of cheap loans with banks expected to on-lend to consumers at a lower rate. “In Kenya, growth is expected to remain solid, but soften somewhat as the accommodative monetary policy does not fully offset the impact of a fiscal tightening,” said the World Bank in the latest Global Economic Prospects.
The Monetary Policy Committee (MPC) - CBK’s organ responsible for the formulation of monetary policy - lowered the Central Bank Rate (CBR) to 8.5 per cent last November, down from nine per cent.
This has now set the stage for cheaper loans weeks after the interest rate cap was repealed.
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Last year, CBK cited the government’s austerity measures as one of the main reasons for lowering the CBK rate.
“The MPC noted that inflation expectations remained well anchored within the target range and assessed that the economy was operating below its potential level.
The committee noted the ongoing tightening of fiscal policy and concluded there was room for accommodative monetary policy to support economic activity,” said CBK Governor Patrick Njoroge in a statement.
Besides tightening fiscal policy, the MPC also attributed benchmark rate adjustment to an economy operating below its potential.
This was the second adjustment in three years.
The apex bank had left the lending rate untouched during interest rate cap regime.
The World Bank had projected GDP growth in 2019 at 4.9 per cent, but this is expected to pick up to 6.3 per cent this year.