Kenya's central bank left its Central Bank Rate (CBRF) at 10 percent, as expected, saying "overall inflation is expected to remain outside the Government target range in the near term due to the elevated food prices, even as demand pressures remain subdued."
The Central Bank of Kenya (CBK), which cut its rate by 150 basis points last year, also said it remains concerned about current uncertainties, including the impact of the government-imposed cap on lending and deposit rates by commercial banks on the effectiveness of monetary policy.
A preliminary analysis, which included a survey of commercial bank officers, showed the rate cap, which went into effect last September, would lead to an increase in demand for credit but actual credit granted would remain constant due to the tighter credit standards.
Also, a market perception survey from this month showed private sector respondents expect a decline of growth this year due to the current drought and a slowdown in private sector credit growth.
While growth of private sector credit has stabilized at 4.0 percent, the share of loans to corporates has risen relative to business and personal loans and the average maturity of loans has shifted to short-term lending.
Loan approvals have declined by 6 percent between December and February this year while lending to micro, small and medium enterprises has declined in value due to reduced lending by large and medium banks, the CBK said.
It added that banks were still adjusting their business models to ensure they remain competitive in the new environment in which lending and deposit rates have been capped at 4 percentage points above the CBK's key rate.
Kenya's inflation rate rose to 9.04 percent in February from 7.0 percent in January, almost entirely due to higher food prices, with food inflation up to 16.5 percent from 12.5 percent due to drought.
In contrast to 2014 and 2015, Kenya's shilling has remained stable in 2016 and this year, supported by a narrower current account deficit and resilient inflows from horticulture, tourism and remittances.
The shilling was trading at 102.8 to the U.S. dollar, steady from 102.2 at the start of the year, with the central bank's foreign exchange reserves up to US$7.762 billion from $6.963 billion at the end of January for import cover of 5.1 months.
The rise in reserves was largely to due inflows from government loans, which together with the $1.5 billion arrangement with the International Monetary Fund provides an "adequate" buffer against short-term economic shocks, the CBK said.