CBK says focus on price stability amid liquidity surge

The Central Bank of Kenya (CBK) has said maintaining price stability going into the second half of the year will be its key priority amid increased liquidity stemming from external loans.

This comes amid a rise in month-on-month inflation which rose from 5.9% in May to 6.3% in June driven by higher food prices such as cooking oil, beef, bread and wheat flour and fuel.

In a post-Monetary Policy Committee briefing on Thursday after the Monetary Policy Committee kept the base rate at 7%, CBK Governor Dr Patrick Njoroge said the sharp rise in liquidity is expected to spur credit growth which intern influence spending among consumers, as the regulator strives to keep inflation rate below the 7.5% target.

“The government received a lot of external flows and it used a lot of this to make payments for the pending bills so we did have a huge influx of liquidity as the government also made payments to the counties,” said Dr Njoroge.

Between April and June, Kenya received a total of Kshs. 76.5 billion ($714.5 million) from the International Monetary Fund (IMF) alone, to cover the cost of additional spending on health, social protection, and speeding up payments to bolster the economy.

“Those payments will see liquidity move through the economy and in the first instance we were doing open market operation to make sure it does not cause significant damage to the economy,” he added.

While Dr Njoroge expects the available cash by banks to sustain upward movement in credit, the 20% excise duty levied on loan fees and commissions under the Finance Act could be counter productive according to analysts.

“The excise duty on loans increases the cost of borrowing hence placing a greater strain on businesses at a time they need maximum support from the government to survive the ravaging effects on Covid. The government is better placed enhancing a low interest rate programme and an aggressive stimulus initiative,” noted Ken Gichinga, Chief Economist at Mentoria Economics.

Private sector credit rose to 7.7% from 6.8% with manufacturing, transport and communications and consumer durable leading credit growth at 8.1%, 11.8% and 23.4% respectively, CBK said on Wednesday when it kept the base rate at 7%.

In the same period, the ratio of non-performing loans to gross loans reduced from 14.2% in April to 14% in June.


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