NAIROBI, Kenya Jul 27 – The Central Bank held steady its benchmark interest rate at 6.25 percent on Wednesday in a move that is expected to encourage lending by commercial banks.
In a statement, CBK’s Monetary Policy Committee said further tightening of monetary policy by hiking the CBR rate would go against what the bank was trying to achieve in lowering inflation.
“The committee observed that the tight monetary policy stance would not achieve the desired results at the moment if the supply sides of food, fuel and energy were not effectively being managed to signal relief to the constraints guiding inflationary expectations,” the statement read.
In its May meeting, the committee reviewed the CBR upwards to 6.25 from six per cent in a move expected to tame inflation and stabilise the exchange rate.
The MPC highlighted that its recent monetary policy-tightening actions had reined in inflationary expectations, but remained concerned about persistent inflationary pressures and exchange rate volatility.
Joshua Anene a currency trader with Commercial Bank of Africa however questioned the move saying it was sending mixed signals to the market arguing with they needed to raise it above 6.25 percent.
“The CBR is meant to be used as a measure of last resort when limits in the inter-bank trade are exceeded but the CBK seems to be running behind the curve. The interest rate of last resort should always be higher lest everyone exploits the discount window,” Mr Anene said.
In June, inflation shot up to 14.5 percent from the 12.95 percent recorded in may, with many analysts predicting it could hit 20 percent by the end of the year.
However, the result has been an upward review by commercial banks on their interest rates. I&M increased its lending rates from 13.5 percent to 15 percent while Commercial Bank of Africa raised its rates from 13 percent to 14.5 percent.
The committee said that the growth of broad money supply has been below its target since September 2010 which rules out demand pull inflation.
“The Committee was of the view that monetary policy was tight enough and that any further tightening would be counter-productive given the underlying factors, the MPC statement explains.
The Committee also decided that commercial banks would be required to maintain Cash Reserve Ratio (CRR) based on a weekly average instead of the current daily average.
