CBK releases more money to banks to control Coronavirus market shocks

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The Monetary Policy Committee (MPC) met the global COVID-19 (coronavirus) pandemic, which has devastated many countries, with significant human, economic and social costs.

The meeting was chaired by the Central Bank Governor Patrick Njoroge.

It was noted that the overall inflation is expected to remain within the target range in the near term, reflecting lower food prices with the favourable weather conditions, a decline in international oil prices and muted demand pressures.

As a result of the pandemic, economic growth is expected to decline significantly in 2020, from a baseline estimate of 6.2 percent to possibly 3.4 percent, arising from reduced demand by Kenya’s main trading partners, disruptions of supply chains and domestic production.

Supply chain

The foreign exchange market has not been spared. The current account deficit is projected at 4.0–4.6 percent of GDP in 2020, but the outcome will depend on the duration and intensity of the pandemic, and its impact on exports particularly horticulture, transport and tourism services, and imports.

Average commercial banks’ liquidity and capital adequacy ratios stood at 51.1 percent and 18.7 percent, respectively, in February. The ratio of gross non-performing loans (NPLs) to gross loans stood at 12.7 percent in February 2020 compared to 12.0 percent in December,

The Private sector credit grew by 7.7 percent in the 12 months to February 2020. However, growth in private sector credit will likely moderate due to the expected weakening in economic activity in the key sectors affected by COVID-19.

Food production for local and export markets is key to the wellbeing of Kenya’s economy. Photo: Dasan Bobo/World Bank

The MPC Private Sector Market Perception Survey conducted in early March 2020 indicated that inflation expectations remained well anchored, mainly due to expected lower food and energy prices.

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Global growth is highly uncertain but expected to weaken significantly in 2020, mainly due to the adverse direct and indirect impact of COVID-19 across the world.

In light of this adverse economic outlook, the MPC, therefore, decided on the following policy actions to prevent the COVID-19 health crisis becoming a severe economic and financial crisis:

CBK will ensure that the interbank market and liquidity management across the sector continue to function smoothly.

a) To lower the Central Bank Rate (CBR) to 7.25 percent from 8.25 percent.

b) Reduce the Cash Reserve Ratio (CRR) to 4.25 percent from 5.25 percent, releasing KES.35.2 billion as additional liquidity availed to banks to directly support borrowers that are distressed as a result of COVID-19.

Additionally, CBK will ensure that the interbank market and liquidity management across the sector continue to function smoothly.

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