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Kenya's central bank cut its key interest rate for the third time in a row to minimize the economic and financial impact from the spread of the coronavirus, and lowered its reserve requirement to release 35.3 billion shilling as additional liquidity for banks to directly support borrowers that are under distress from the virus.


The Central Bank of Kenya (CBK) cut its Central Bank Rate (CBR) by another 100 basis points to 7.25 percent and has now cut it by 175 basis points since November 2019 when it began easing its monetary policy stance following the repeal of the cap on banks' interest rates.


It is CBK's second cut this year following a cut in January when it said there was room for further accommodation to support economic activity, which has slowed in the last four quarters.

CBK also lowered its cash reserve ratio (CRR) by 100 basis points to 4.25 percent to release liquidity so banks can boost their lending and said it would ensure the interbank market and liquidity management continues to function smoothly.


The bank's monetary policy committee said it was closely monitoring the impact of the change to its policy stance, as well as the global and domestic economy, and "stands ready to take additional measures as necessary."


"In this regard, the Committee decided to reconvene within a month for an early assessment of the impact of these measures and the evolution of the COVID-19 pandemic," it said.


While the adverse effect of the virus on Kenya is still evolving, CBK said "it is already evident that the impact may be severe" and economic growth is expected to decline significantly this year.


CBK said the rate of growth may decelerate to 3.4 percent this year from an earlier estimate of 6.2 percent due to reduced demand from its trading partners, disruptions of supply chains and domestic production.


In the third quarter of 2019, Kenya's gross domestic product slowed to 5.1 percent year-on-year from 5.6 percent in the second quarter.


Kenya's shilling has come under heavy downward pressure in recent weeks on concern over its exports, for example flowers to Europe, amid the sudden slowdown in the global economy, with the central bank seen selling U.S. dollars to limit the losses.


Today the shilling was trading around 106.4 to the U.S. dollar, above the record lows that were seen in September 2015, and down 4.7 percent since the start of this year.


Kenya's inflation rate has been rising in the lasts 5 months to 6.37 percent in February but CBK said it expects inflation to remain within its target range in the near term due to lower food prices, favorable weather, a decline in oil prices and muted demand pressures.

 

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