By Jacktone Lawi
The Central Bank of Kenya's Monetary Policy Committee (MPC) has cut the base lending rate by 75 basis points to 12 per cent, responding to a sharp decline in private sector credit in the first half of 2024.
The decision comes amid a slowdown in economic growth during the second quarter of the year, as well as a significant drop in inflation.
Central Bank of Kenya in its MPC briefing noted that there has been a sharp deceleration in credit to the private sector which has had a ripple effect leading to the slowdown in growth in the second quarter of 2024.
Chair of the Monetary Policy Committee Kamau Thugge said the economic performance has shown that there was scope for a further easing of the monetary policy stance to support economic activity.
“Therefore, the Committee decided to lower the Central Bank Rate (CBR) to 12 percent,” said Thugge in the brief.
The MPC cited the need for a more accommodative monetary policy to support economic activity while maintaining exchange rate stability. The Central Bank Rate (CBR) cut is intended to stimulate credit flows to the private sector and promote growth.
According to CBK, growth in commercial bank lending to the private sector stood at 1.3 percent in August 2024 compared to 3.7 percent in July.
The committee attributed this drop partly to exchange rate valuation effects on foreign currency denominated loans following the appreciation of the Shilling, and the lagged effects of monetary policy tightening.
Growth in local currency-denominated loans stood at 5.2 percent in August, with the foreign currency-denominated loans, which account for about 26 percent of total loans, contracting by 10.6 percent.
In the period under review, inflation fell to 3.6 percent in September 2024, down from 4.4 percent in August. The decline was driven by lower food prices, with vegetables such as tomatoes, cabbages, and potatoes becoming more affordable, and by reduced fuel inflation due to stable electricity and fuel prices.
Non-food, non-fuel (NFNF) inflation also eased slightly to 3.4 percent. Despite the positive inflation trend, the Kenyan economy's growth has slowed, with second-quarter GDP expanding by 4.6 percent, down from 5.6 percent in the same period in 2023.
As a result, Kenya's projected 2024 economic growth rate has been revised downward to 5.1 percent.