CBK steps up its cash injections to stimulate growth

The Central Bank of Kenya. The bank seeks to spur private sector credit, which has fallen behind projections. Photo/FILE  Nation Media Group

By GEOFFREY IRUNGU

In Summary

• The amount, which translates into an average of nearly Sh20 billion every month, reflects the State’s ease with the level of inflation, which allowed it to expand supply of money without sparking a sharp increase in the cost of goods and services.
• The report however criticises commercial banks for being slow to react to the regulator’s signals for a loose monetary policy.
• CBK confirmed the monetary expansion drive, saying it was intended to spur private sector credit, which has been lagging behind projections.

The Central Bank of Kenya (CBK) has injected into the economy a massive Sh239 billion in the past one year to stimulate growth, new World Bank data shows.

The amount, which translates into an average of nearly Sh20 billion every month, reflects the State’s ease with the level of inflation, which allowed it to expand supply of money without sparking a sharp increase in the cost of goods and services.

The report however criticises commercial banks for being slow to react to the regulator’s signals for a loose monetary policy.

“While commercial banks were quick to increase their lending rates as CBK tightened monetary policy, they have not reacted with similar vigour in reducing their lending rates to their customers during the monetary easing,” said the report dated this month titled Kenya Economic Update: Time to Shift Gears.

It indicates the monetary authority stepped up the cash in circulation by 18.5 per cent in April this year, representing the single largest growth year-on-year since March 2011.

CBK confirmed the monetary expansion drive, saying it was intended to spur private sector credit, which has been lagging behind projections.

The new cash pumped into the economy brings the money supply to Sh1.58 trillion, just below a half of the size of the economy that now stands at Sh3.44 trillion.

The cash is in the form of broad money (M2), which comprises not only the various forms of deposits but also instruments that are easily convertible into cash such as treasury bills and bonds. In terms of M1, which is cash in banks and individuals’ hands used in daily transactions, the expansion was an even bigger 20 per cent.

The CBK data shows that credit has failed to grow as expected since last July. Private sector credit expanded by only 11.5 per cent in February this year, against a target of 16.8 per cent. In January, credit expanded by only 12 per cent against a 17 per cent target.

However, with consistent reduction and stabilisation of the inflation rate, the Monetary Policy Committee (MPC) has been moving with speed to ease the policy stance and inject cash into the economy through lower interest rates.

While the Central Bank Rate (CBR), which represents the lowest or base lending rate to commercial banks from the CBK, has come down to 8.5 per cent from a high of 18 per cent in early July 2012, this has not fully translated into lower lending rates prompting the CBK to use the monetary stimulus.

READ: CBK cuts the cost of loans to spur economic growth

“We have allowed the monetary expansion because we realised that targets for credit expansion were not being met. So we needed to give a push to encourage private sector lending,” said Terry Ryan, a member of the MPC, which normally meets once every two months to set the policy rate.

The next MPC meeting is scheduled for July 9. Lending to the private sector stood at Sh1.306 trillion in February, an 11.5 per cent growth from the same month last year.

However, there has been considerably domestic borrowing for the financial year ending this month, requiring intervention of CBK to remove its market impact.