January 27, 2020 / 2:33 PM / 23 days ago

UPDATE 2-Kenyan central bank makes second cut to key lending rate

(Adds details, background, analyst comments)

By Omar Mohammed and George Obulutsa

NAIROBI, Jan 27 (Reuters) - Kenya’s central bank cut its benchmark lending rate on Monday for the second time in a row, saying the economy was operating below potential and there was room for a more accommodative monetary policy.

The bank slashed the rate to 8.25% from 8.50%. This follows a reduction in November by 50 basis points, the first such move by policymakers after holding it for seven straight meetings.

“The Committee ... noted that there was room for further accommodative monetary policy to support economic activity. The MPC (Monetary Policy Committee) therefore decided to lower the CBR (Central Bank Rate),” the bank said in a statement.

The rate reduction went against analyst forecasts. In a Reuters poll of eight economic analysts last week, all expected the rate to be held steady.

“The ... cut, so soon after the November easing, came as a surprise to markets,” said Razia Khan, head of research for Africa at Standard Chartered Bank.

“It likely demonstrates the resolve of the CBK to provide more accommodative monetary conditions in order to support growth, given that (in its view), conditions allow for this accommodation.”

Governor Patrick Njoroge told Reuters in November that the scrapping of an interest rate cap, in place since 2016, had removed one of the concerns the central bank had about cutting the lending rate.

The bank said private sector credit grew by 7.1% in the 12 months to December and it would expand further due to the repeal of the rate caps and new credit products targeting small and medium businesses.

“This easing will support credit flow to the private sector,” said Jibran Qureishi, regional economist for East Africa at Stanbic.

“However, for it be effective, fiscal policy would have to be contractionary.”

The finance ministry projects the budget deficit will shrink to 5.7% of GDP in 2020/21 from a forecast of 6.3% of GDP in 2019/20, and narrow further to 3.3% in 2023/24.

The bank said it forecast the current account deficit to rise slightly to 4.7% of gross domestic product this year from an estimated 4.6% in 2019 and 5.0% a year earlier.

The National Treasury said earlier this month economic growth was forecast to have slowed to 5.6% in 2019, from 6.3% a year earlier, and well below the government’s initial estimate of about 6%.

The government forecasts growth of 6.1% this year, rising to 7% in the medium term. (Reporting by George Obulutsa and Omar Mohammed; Editing by Giles Elgood)

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