Written by David Indeje 2012-07-05 16:47:00 Read 608 Times

Small business traders who have high hopes that with lowering of the CBR rate, thye will be able to service their loans and apply for new ones.

The Central Bank of Kenya (CBK), through its Monetary Policy Committee, decided to lower the rate by 150 basis points at which it lends to commercial banks at 16.5 per cent.

This is the first time since December last year the committee has made a change which had been maintained at 18 per cent the Central Bank Rate (CBR) since beginning of this year.

Though cost of living has been on a decline since January this year, with Junes’ inflation rate coming down to 10.05 per cent from 12.22 the month of May,  the committee said, “measures of inflation declined in June 2012 indicating easing inflationary pressure and a return to price stability. The overall month-on-month inflation declined from 12.22 percent in May 2012 to 10.05 percent in June 2012 mainly arising from a reduction in food and fuel prices.”

However, it expressed concerns that the current account deficit remains high at 11.3 percent as of May posing a threat to the exchange rate stability and the global economic growth which had weakened in the recent weeks.

“The current account deficit which eased slightly from an estimated 11.4 percent of GDP in April 2012 to 11.3 percent in May 2012 remains high and continues to pose a threat to exchange rate stability as well as the pass-through effects to domestic prices,” said Prof. Njunguna Ndungu the chairman of the MPC.

He added that, the two factors still pose a challenge to demand for Kenya’s exports as well as foreign earnings from tourism.

However, they were optimistic that the policy stance employed was “robust and should continue to bring inflation towards the medium-term target” able to sustain the price stability.

Further, it decided to revert to its bi-monthly meetings to closely monitor market developments.

The lowering of the CBR rate raised different opinions, Jimnah Mbaru , the former chairman of the Nairobi Stock Exchange –NSE and Dyer and Investment bank said, “ the MPC has done the right thing to bring down the CBR. It will help the economy.” He added that, “Lending rates by commercial banks will come down stimulating the economy.”

This is contrary to the International Monetary Fund visiting assistant director for African affairs Domenico Fanizza who had opted for, “The current tightened monetary policy at 18 per cent should be allowed to prevail.”

This means commercial bank will be under pressure to reduce interest rates on loans from current 28% to 24 % lending rate after the change to be a reprieve to the borrowers.

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