Yesterday the Central Bank’s monetary policy committee met and announced the reduction of the base lending rate to 9.5% from 10%. The CBK explained that this move was taken in order to boost economic output which is below its potential level. This has an effect of lowering the interest rates that banks can lend to customers to 13.5% thus making it cheaper for customers to borrow.
While lowering the base lending rate, the CBK noted that the month on month overall inflation fell from 4.8% in January to 4.5% in February. The current account deficit narrowed to 6.1% of GDP in the 12 months to January 2018 down from 6.4% in 2018. This is expected to narrow to 5.4% of the GDP this year due to continued growth in tea and horticulture exports, diaspora remittances, and growth in tourism. The CBK foreign exchange reserves are at an all-time high of USD8,832 million up from USD7,089 million in January 2018, and are expected to continue providing an adequate buffer against short term shocks in the foreign exchange market. The Private sector credit grew by 2.1 percent in the 12 months to February 2018, slightly lower than the 2.4 percent in December 2017.
This will be the first time that the CBK has change the base lending rate since September 2016. It will remain to be seen whether it will have an effect in the uptake on credit by the private sector pending the removal of the interest rate cap.