The Central Bank of Kenya has surpassed market expectations and cut the Central Bank Rate (CBR) to 7.25 per cent from 8.25 per cent at its March 2020 Meeting. The 100 basis points drop, its third straight cut, pushes the bank’s key lending to nearly a nine-year low. Just like other policymakers around the Globe, the cut is meant to “prevent the COVID-19 health crisis becoming a severe economic and financial crisis”, according to a press release seen by Kenyan Wallstreet.
In a move seen to suit the banking sector, CBK reduced the Cash Reserve Ratio (CRR) to 4.25 per cent from 5.25 per cent. This, in turn, availed Ksh35.2 billion as additional liquidity to banks thus enabling direct support to borrowers distressed by COVID-19.
CBK expects a sharp decline in economic growth in 2020 from a baseline estimate of 6.2 per cent to possibly 3.4 per cent. CBK attributes the decline to reduced demand by Kenya’s main trading partners, disruptions of supply chains and domestic production. In this case, the fundamental concerns centre on the health impact, job losses, and duration of the crisis. In addition, CBK lauded governments interventions aimed at containing the pandemic and moderating the economic and social impact.
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The committee was keen to deal with inflationary pressure and a rapidly weakening shilling, which on Friday fell to Ksh106.51 against the US Dollar, the lowest since 2011. Panic in the foreign exchange market in the wake of COVID-19 has led to a surge in demand for the US dollar. This, in turn, has led to a significant strengthening of the US dollar in the global markets.
Therefore, CBK projects the current account deficit at 4.0-4.6 per cent of the GDP in 2020 dependent on the duration and intensity of the pandemic, and its impact on exports particularly horticulture, transport and tourism services, and imports. CBK is betting on a lower petroleum products import bill to moderate the impact of COVID-19 on the current account. However, CBK remains confident that the foreign exchange reserves (Standing at $8,251M or 5.01 months of import cover) remain adequate to cover and buffer against short term shocks in the foreign exchange market.
CBK move to lower rates follows that of Central Banks in developed worlds that have come forward to save their economies. The global economic outlook remains highly uncertain, although the adverse effects of the pandemic on the Kenyan economy are still evolving. Global growth is projected to weaken in 2020 due to COVID-19; trade disruptions, volatility in international financial markets, and travel ban.