1. BACKGROUND TO THE MPC DECISION of March 22, 2011
A Presentation to the Media by
Prof. Njuguna Ndung’u, CBS
Governor, Central Bank of Kenya
March 28, 2011

2. 1. Key Messages from the MPC Meeting
The MPC tightened the monetary policy stance on 22nd March, by raising the CBR to 6 percent:
inflation beginning to be persistent and likely to have permanent effects on domestic prices;
Instability of the exchange rate due to political events in Middle East and North Africa.
Policy stance expected to protect economic activity by controlling inflation and stabilizing the exchange rate.
Despite these shocks, there is sustained confidence in the economy supported by results of the March 2011 Market Perception Survey and continued decline in credit risk.

3. Key Messages from the MPC Meeting…
A new monetary programme under the Extended Credit Facility is in place – targets are consistent with the current monetary policy stance. Foreign exchange disbursements expected to dampen pressure on the exchange rate.
Continuation of strong performance of the banking industry with significant increase in number of loan accounts and growth in credit – however, the interest rate spread remains high.

4. 2a. Drivers of Inflation : Food, oil prices and transport costs increasing
Inflation has been pushed up by food, fuel and transport costs. Some of these pressures
could be shed off in the coming months.
The impact of the dry spell and political crises in North Africa and Middle East countries
have exerted pressure on food and oil prices, respectively.

5. 2b. Contribution to Overall CPI Inflation
Contribution of food inflation rising (accounts for 56 percent of inflation).
Transport and Housing (including electricity and fuel costs) account for 33 percent of inflation.
Communication pulling down the index by about 1 percentage point.

6. 2c. Global Food Prices: Food Inflation a Global Phenomenon
High food prices a global phenomenon: world food inflation accelerated to percent in February 2011 from 25 percent in December 2010 due to rising prices of oil and cereals.
Domestic dry weather conditions worsened the food price increases that would have otherwise been recorded due to increases in international food prices.

7. 2d. Exchange Rate Policy: The Exchange Rate is An Automatic Stabilizer
The foreign exchange policy and foreign exchange management: It is good to re-state the policy and the benefits that accrue; several benefits accrue to the Kenyan economy with a floating exchange rate regime
It allows for a continuous adjustment of the exchange rate in line with the demand and supply conditions of foreign exchange in the economy
The market equilibrates or adjusts through the exchange rate movements rather than the level of reserves changing

8. 2d. Exchange Rate Policy: The Exchange Rate is An Automatic Stabilizer ...
It allows the CBK to pursue an independent monetary policy to address the core mandate - fighting inflation - without being overly concerned about the balance of payments effects → these effects are balanced by the exchange rate movements
External shocks and internal imbalances are reflected in exchange rate movements rather than reserve movements or calls for CBK intervention to control the adjustment process
For this reason, the exchange rate is an automatic stabilizer.

9. 2d. Normalised Daily Exchange Rates (15th Sep. 2008 = 1)
The exchange rate is an automatic stabiliser – shocks are absorbed and adjustments
made through it. This provides the economy with an appropriate adjustment tool.
Since late 2007, we identify seven shocks of differing magnitudes which are explained by
different events. But the exchange rate also has the ability to return to its long-run
mean.

10. 2e. Exchange Rates: Kenya Shilling More Stable in the Region
Kenya Shilling exchange rate has been relatively more stable against the USD compared with the Uganda and Tanzania Shillings.

11. 2f. Growth in Credit: Credit Expansion Financing Growth
41.3 Bn
Credit grew in January and February 2011 by Ksh.41.3 billion even when the dry spell was prevailing. This is consistent with the stance taken then and the commensurate demand for credit from the private sector.

12. 2g. Net Non-Performing Loans/Total Loans: Credit Risk Declining
Net NPLs/Total Loans (%)
Loan Weighted Sector NPLs/Loans
Dec-09
Dec-10
Feb-11
Comment
Agriculture
0.71
0.50
0.49
improved
Manufacturing
1.10
0.76
0.72
Building and Construction
0.16
0.15
Stable
Mining and Quarrying
0.01
stable
Energy and Water
0.04
0.02
Trade
1.75
1.35
1.27
Tourism, Restaurant and Hotels
0.23
0.22
Transport & Communication
0.39
0.38
Real Estate
0.95
0.70
0.7
Financial Services
0.18
Personal/Household
2.23
1.97
Total
7.94
6.25
6.09
Credit risk has generally declined across all the sectors implying increased confidence in the economy.

13. 2h. Credit: Increasing Credit Expansion as Indicated by Growing Number of Loan Accounts
Sectors
Dec' 09
Dec’ 10
Feb' 11
Change Dec’ 10/Feb’11
Agriculture
110,798
117,371
123,532
5.2%
Manufacturing
11,518
18,936
20,084
6.1%
Building and construction
5,668
7,923
8,674
9.5%
Mining and Quarrying
1,022
1,294
26.6%
Energy and Water
4,825
4,896
5,133
4.8%
Trade
262,988
285,763
255,587
(10.6%)
Tourism, Restaurant and Hotels
4,913
5,364
5,232
(2.5%)
Transport and Communication
23,587
23,521
24,462
4.0%
Real Estate
14,060
14,495
15,534
7.2%
Financial Services
27,151
29,683
35,490
19.6%
Personal/Household
1,206,434
1,284,690
1,359,998
5.9%
Grand
1,672,964
1,793,664
1,855,020
3.4%
Most sectors continue to register growth in loan accounts. There was an increase of
61,356 loan accounts between December 2010 and February 2011.

14. 2i. Average Commercial Banks Lending Rates
Category of Bank
(Size)
Average Base Rate
Change in Base Rate Feb-11/
May 2010
Average Lending Rate
Change in average lending rate Feb-11/
Dec 2010
Jan 2011
Feb 2011
All Banks
14.59
14.24
-0.35
14.44
13.87
14.03
13.92
-0.52
Small Banks
14.80
14.52
-0.27
14.83
14.61
14.82
-0.01
Medium Size Banks
14.04
-0.57
14.46
14.20
13.85
-0.61
Large Banks
13.96
13.67
-0.29
15.43
14.95
14.93
14.66
-0.77
Average lending rates and base rates responded to MPC signals with
declines between May 2010 and February 2011.
All categories of banks reduced their average lending rates between
May 2010 and February 2011.
Medium banks were charging the lowest rate, on average, by February
2011.

15. 2j. Interest Rates Spread Remains High
Lending rates  
Deposit rates  
Interest Rate Spreads
All Banks
Small Banks
Medium Size Banks
Large Banks
May-10
14.44
14.83
14.46
15.43
4.62
5.11
4.79
3.22
9.82
9.72
9.67
12.21
Jun-10
14.39
15.29
14.30
15.19
4.45
4.59
4.47
3.23
9.94
10.70
9.83
11.96
Sep-10
13.98
14.54
14.10
15.10
3.53
4.43
3.67
2.45
10.45
10.11
10.44
12.64
Dec-10
13.87
14.20
14.95
3.59
3.46
2.19
10.28
9.42
10.74
12.76
Jan-11
14.03
14.61
14.93
3.43
4.96
3.50
2.00
10.60
9.65
10.71
12.94
Feb-11
13.92
14.82
13.85
14.66
3.41
4.91
3.34
2.07
10.51
9.92
10.50
12.59
The average spread increased by 69 basis points between May 2010
and February 2011 due to a faster decline in the average deposit
rates.
Large banks trading on their market power by offering the lowest
deposit rate and maintaining the highest spread.

16. Non-Bank Private Sector Firms
2k. Economic Growth: Sustained Optimism by Banks and Non-Bank Firms for Higher Economic Growth in (%)
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
Mar 2011 4 36
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 29 59 12