1. Background to the Decision of the Monetary Policy Committee on 27th January, 2011
Njuguna Ndung’u, CBS
Governor,
Central Bank of Kenya
1st February, 2011

2. 1. Key Messages
The current monetary policy stance has been successful as evidenced by:
Broad based economic growth,
Low and stable inflation regime,
Decreased volatility in the interbank rate,
The CBR effective in coordinating movement in short term interest rates.
Increased optimism and confidence in the economy supported by results of the January 2011 MPC Market Perception Survey and rise in imports of investment and intermediate goods.
Improved performance of the banking system, expanding branch network across all regions and continued decline in non-performing loans across all sectors.
Private sector investment should be supported with adequate and affordable credit to enhance growth.
Although banks have generally lowered their lending rates, there is scope to lower rates further.

3. 2a. Policy Implementation: Credit to private Sector
Private sector credit expansion has generally been on target.
Given the strong link between growth in private sector credit and economic growth, improved credit expansion indicates increased demand to finance economic activity.

4. 2b. Policy Implementation: Broad Money Supply growth and Inflation
Broad money supply (M3) generally on target.
Despite growth in M3, overall inflation has generally been target
indicating no threat of monetary inflation. This provides room for
banks to expand credit.

5. 2c. Policy Implementation: Short Term Interest Rates Declining
Short term rates (repo, interbank, 91-day TB) have generally declined as coordinated by CBR movement and signals.

6. 2d. Policy Implementation: Market Stability-Daily Interbank Interest rate
Reduced volatility in the interbank market since June 2010 indicates
success in liquidity management.

7. 3a. Market Outcomes: Growth in Real GDP and Credit
Economic growth is being supported by credit to private sector.

8. 3b. Market Outcomes: Inflation
Overall inflation has generally been within the 5 percent target.
Increases in overall inflation since November 2010 driven by supply
factors mainly food and prices.
However, the Government has put in place adequate measures to
resolve the existing food distribution challenges.

9. 3c. Market Outcomes: Net Non-Performing Loans/ Total Loans
Loan Weighted Sector NPLs/Loans
Dec-09
Dec-10
Comment
Agriculture
0.71
0.50
improved
Manufacturing
1.10
0.76
Building and Construction
0.16
0.15
Mining and Quarrying
0.01
Energy and Water
0.04
0.02
Trade
1.75
1.35
Tourism, Restaurants and Hotels
0.23
Transport & Communication
0.39
0.38
Real Estate
0.95
0.70
Financial Services
0.18
Personal/Household
2.23
1.97
Total
7.94
6.25
Credit risk has generally declined across all the sectors of the economy implying increased confidence.

10. 3d. Market Outcomes: Average Commercial banks lending rates declining
Despite the decline in lending rates, there is scope for banks to reduce the lending rates further with improved liquidity conditions, lower credit risk and increased economic activity.

11. Change in Base Rate Dec/ Change in average lending rate Dec/
3e. Market Outcomes: Base and Average Lending Rates declining
Category of Bank
(Size)
Average Base Rate
Change in Base Rate Dec/
May 2010
Average Lending Rate
Change in average lending rate Dec/
Sep 2010
Nov
2010
Dec 2010
All Banks
14.59
14.30
14.24
-0.35
14.44
13.98
13.95
13.87
-0.57
Small Banks
15.02
15.10
14.90
-0.12
14.85
14.43
15.12
14.62
-0.23
Medium Size Banks
14.75
14.42
-0.33
13.57
14.74
13.86
-1.16
Large Banks
14.28
13.79
13.76
-0.52
14.77
14.41
14.82
14.37
-0.40
Average lending rates and base rates have continued to respond to MPC
signals with declines between May and December 2010.
Large and medium size banks reduced their lending rates between May
and December These banks continue to lead the market in
reducing lending rates with medium size banks charging the lowest
rate, on average, by December 2010.
29 banks reduced base lending rates between March and December
2010 out of which 5 were large banks.

12. 3f. Market Outcomes: Interest Rate Spread remains high
Lending rates  
Deposit rates  
Interest Rate Spreads   
All Banks
Small Banks
Medium Size Banks
Large Banks
May-10
14.44
14.85
15.02
14.77
4.62
4.10
5.03
4.00
9.82
10.75
9.98
10.77
Jun-10
14.39
15.43
15.09
14.58
4.45
3.65
4.96
3.77
9.94
11.78
10.13
10.80
Jul-10
14.29
15.61
15.10
14.62
3.85
3.82
4.70
3.39
10.44
11.79
10.41
11.23
Aug-10
14.18
15.37
14.78
14.55
3.74
3.98
4.66
3.21
11.38
10.12
11.34
Sep-10
13.98
14.43
13.57
14.41
3.53
4.11
4.42
3.03
10.45
10.32
9.14
Oct-10
13.85
14.46
13.17
14.06
3.51
3.70
4.36
3.00
10.34
10.76
8.81
11.06
Nov-10
13.95
15.12
14.74
14.82
3.54
3.72
4.34
2.91
11.40
10.40
11.91
Dec-10
13.87
13.86
14.37
3.59
3.68
4.09
2.86
10.28
10.94
9.77
11.51
The average spread increased by 46 basis points between May and
December This was driven by the spread for large banks that
increased by 74 basis points, as small banks increased their spread by
19 basis points.
However, the spread for medium size banks declined by 21 basis points
over the period.

13. 3g. Market Outcomes: Idle Liquidity in Banks Reducing….
Liquidity ratio (net-off government securities) has been declining indicating reduction in idle cash in the banking sector. This partly explains the expansion in private sector credit.

14. 3h. Market Outcomes: Expanding Footprint of banking services ….
Region
2005
2006
2007
2008
2009
2010
Central 71 80 78
100
106
115
Coast 72 75 93
111
126
135
Eastern 39 36 61 90 91
Nairobi
214
239
293
353
395
411
N/Eastern 4 6 10 15 18
Nyanza 40 41 52 69 70
Rift Valley 82
128
137
156
175
Western 19 29 48
Total bank branches
534
575
740
887
996
1063
Number of ATMs
555
737
1078
1510
1827
2052
Increasing branch network disaggregated by region, and ATMs indicates enhanced access to financial services - financial inclusion

15. 4a. Forecast: Economy’s Growth capacity to be enhanced by increased Imports of Capital goods…
Expansion in imports of intermediate inputs and investment goods an indication of confidence in the economy and potential for future growth of the economy

16. 4b. Forecast: Enhanced Confidence in the Economy
Standard and Poor’s upward revision of Kenya’s credit rating to B+ with stable outlook reinforcing the previous rating by Fitch.
There are no specific threats in the balance of payments particularly since the Government has been negotiating an Extended Credit Facility (ECF) programme with the IMF.
Socio-political developments giving clear signs that new constitution will be implemented.

17. 4c.Changes in Perceptions on Economic Growth (%)
Commercial Banks
2-3
3-4.4
4.5-5 5
5-5.6
5.7-6
Above 6
Sep -2009 68 24
Nov-2009 56 22
Jan-
2010 41 59
Mar-2010 40 60
May-2010 76
July-2010 17 69 14
Sep-2010 9 82
Nov 3 12 39 46
Jan 2011
28.6
60.7
10.7
Non-Bank Private Sector Firms
2-3
3-4.4
4.5-5 5
5-5.6
5.7-6
Above 6 68 24 90 10 73 27 86 14 53 33 9 17 66 16 21 63 19 50 31 28 40
Increased optimism by banks and non-bank private sector firms for higher economic growth in 2011