MPC retains CBR at 7.00 percent
The Monetary Policy Committee lowered the Central Bank Rate (CBR) to 7 percent at its 27th May meeting. The MPC met against a backdrop of the continuing global COVID-19 pandemic, and measures taken by authorities around the world to contain its spread and impact. The committee assessed the economic impact so far, and the outcomes of its policy measures that were deployed in March and April to mitigate the adverse economic effects and financial disruptions.
The global economic outlook in 2020 has deteriorated further and remains highly uncertain. GDP across the advanced economies contracted sharply in the first quarter, mainly reflecting widespread business closures, severe disruptions to trade and supply chains, and the collapse in global travel. The growth is expected to worsen further in the second quarter, with the imposition of more stringent containment measures.
Several countries have commenced limited and cautious reopening of their economies, but risks remain elevated on a possible resurgence of the pandemic. Additionally, the re-emergence of US-China trade tensions portends a significant risk to the recovery of the global economy.
In Kenya the leading indicators of the Kenyan economy point to relatively strong GDP growth in the first quarter of 2020. Nevertheless, growth is expected to weaken in the second quarter, due to the adverse impact of the containment measures, particularly in transport and storage, trade and accommodation and restaurants. As a result, real GDP growth in 2020 could slow to about 2.3 percent from 5.4 percent in 2019.
Overall inflation is expected to remain within the target range in the near term. This is supported by improving food supply due to favorable weather conditions, lower international oil prices, the impact of the reduction of VAT, and muted demand pressures.
The lowering of the Cash Reserve Ratio (CRR) in March released KES 35.2 billion to the banking sector and continues to be transmitted through the economy. To date, 82.6 percent of the funds (or KES 29.1 billion) have been channeled to support lending, especially to the tourism, transport and communication, real estate, trade, and agriculture sectors.
The banking sector remains stable and resilient, with strong liquidity and capital adequacy ratios. The ratio of gross non-performing loans (NPLs) to gross loans stood at 13.1 percent in April, compared to 12.5 percent in March. This was due to increased NPLs in the real estate, trade, and manufacturing sectors following a further slowdown in economic activity in the Central Bank of Kenya.
The Committee noted the additional fiscal measures under the(8) eight Economic Stimulus Programme announced by President Uhuru Kenyatta to cushion vulnerable citizens and businesses from the adverse effects of the pandemic, and enhance economic activity are expected to be implemented expeditiously in the Financial Year 2020/21.
They will focus on key sectors of the economy including agriculture and food security, tourism, manufacturing, education, health, information and communications, and the Micro Small and Medium-sized Enterprises (MSMEs).
The Committee noted that the policy measures adopted in March and April were having the intended effect on the economy, and are still being transmitted. The MPC concluded that the current accommodative monetary policy stance remains appropriate, and therefore decided to retain the Central Bank Rate (CBR) at 7.00 percent.
The MPC will continue to closely monitor the impact of the policy measures so far, as well as developments in the global and domestic economy, and stands ready to take additional measures as necessary. In this regard, the Committee decided to reconvene within a month.