Kenya's central bank said on Tuesday it would be revising its monetary policy targets after signs that two years of monetary easing had lowered commercial lending rates and increased loan volumes.

Central Bank of Kenya Governor Njuguna Ndung'u said that although the financial sector was deepening, there was scope for banks to raise credit further.

The bank's Monetary Policy Committee (MPC) cut its benchmark lending rate KECBR= by 300 basis points between late 2008 and July this year.

It has since left the rate unchanged at 6 percent, saying growth is on track, inflationary risk is minimal and credit is growing. [ID:nLDE6AO18E]

The market is deepening very fast. Everybody is bringing back money into the market, it is improving the transmission mechanism of monetary policy. We have to revise our framework in line with that, Ndung'u told a press conference.

The stance is that we want to consolidate and stabilise the gains we are seeing. That is why we are not changing the CBR.

Loans increased by 34.8 billion shillings in October, 4 percent higher than in August, and represented 70 percent of gross deposits. Non-performing loans accounted for 1.82 percent of total lending, from 2.93 percent in January, the MPC said.

Commercial lending rates were responding to policy with average rates coming down, especially with medium-sized banks, it said. Middle-tier banks were loaning money at an average 13.17 percent in October, down from 15.02 percent in May.

These, however, still left room for a lot of improvement, Ndung'u told a news conference.

What we would like to see is higher lending, more money going into the market but at lower prices. Lending rates must come down, we want to see lending rates that are commensurate with returns on investments and secondly, also following the decline in inflation, he said.

Inflation declined to 3.09 percent in October from 4.7 percent in January.

MORE FOREX PURCHASES

The MPC said the central bank should continue to participate in the local foreign exchange market to increase its reserves.

Dealers have complained that the purchases amount to intervention but the central bank says it needs to boost reserves to the mandatory four months of import cover.

There was no correlation between exchange rate movements and central bank activity and therefore the bank should continue to build up foreign exchange reserves as required by previous MPC decisions, a statement by the MPC said.

The government forecasts economic expansion of up to 5.0 percent this year and optimism in east Africa's biggest economy is growing. On Nov. 19, credit rating agency Standard & Poor's raised Kenya's rating to B+ with a stable outlook after the country passed a new constitution.

The MPC said government borrowing is on track and has not placed undue upward pressure on interest rates although treasury bill yields have ticked up. Short-term interest rates have risen slightly in the last month, said Ndung'u, who heads the MPC, as commercial banks showed non-competitive tendencies at Treasury bill auctions.

Close coordination with the Treasury ... kept the cost of borrowing down -- it was necessary to send strong messages that the auction for Treasury bills and bonds should be competitive, the MPC said in a statement.

The finance ministry intends to borrow 105.2 billion shillings ($1.3 billion) from domestic markets this financial year, although analysts predict this will most likely rise because revenue collections have fallen behind target.

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