During its bi-monthly meeting, the MPC cited a stable currency and inflation, which was within the government target of 7.5 per cent.
The country’s overall inflation rate stood at 7.39 per cent in June 2014 up from 7.30 per cent in May 2014.
“Confidence in the economy remains strong,” said the Central Bank of Kenya (CBK), adding that the latest sovereign rating by Moody's, placing Kenya at B1 with stable outlook, and a 440 per cent oversubscription of the country’s maiden issuance of a sovereign bond, had boosted Kenya’s capacity for a faster rollout of public investments.
(WATCH VIDEO: Kenya's central bank holds key lending rate at 8.50%)
Policymakers at the same time introduced the Kenya Banks Reference Rate (KBRR) at 9.13 per cent, which will be the new base rate of all commercial banks’ lending rates. The KBRR tracks the Central Bank Rate (CBR) as well as the weighted two-months moving average of the 91-day Treasury Bill, and will be reviewed twice a year.
The CBR is meant to guide commercial banks on reviewing their lending rates based on prevailing macro-economic conditions, but has largely been overlooked, leading to the high cost of borrowing.
Yvonne Mhango, economist for sub-Saharan Africa at Renaissance Capital, believes that the KBRR would ultimately boost credit growth in Kenya.
“One of the functions of the KBRR is to have a more market-related rate which is computed with the 91-day Treasury bill rates, and of course that is more market determined than the existing policy rate,” said Mhango.
The KBRR will take effect from 8 July and is expected to spur private sector credit, which grew fractionally to 24.99 per cent in May from the previous month.
Mhango added that there was room for the interest rate to increase by 150 basis points by the end of the year, despite concerns of the county’s sluggish economic outlook, which has been hurt by poor agricultural and tourism output following high insecurity in the country.
“We are projecting an increase in interest rate in the second half of the year and that is largely based on our inflation outlook. We are expecting inflation to increase from between 9 per cent and 10 per cent,” said Mhango.