Kenya’s CBK raises rates again

December 1, 2011
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Central Bank of Kenya Governor Prof Njuguna Ndung'u
NAIROBI, Kenya, Dec 1 – The Central Bank of Kenya’s Monetary Policy Committee (MPC) on Thursday yet again defied market expectation by raising its benchmark interest rate by 150 basis points to 18 percent from the 16.5 percent set on November 1.

In arriving at this decision, the MPC noted that since inflation continued to increase in November it was necessary to enhance monetary policy actions, including the Cash Reserve Ratio raised in the last MPC meeting which were still transmitting through the market.

“The Committee therefore decided to revise upwards the Central Bank Rate by 150 basis points from 16.5 percent to 18.0 percent. This is expected to ease inflation and contain inflationary expectations,” MPC Chairman Prof Njuguna Ndung’u said in a statement.

The latest hike comes after the CBK hiked the base lending rate by a whooping 550 basis points to 16.5 percent in November after it had initially shocked the market by raising its benchmark rate by 400 basis points to 11 percent as it struggles to tame the runaway inflation and weak shilling.

Duncan Kinuthia a foreign exchange dealer at Commercial Bank of Africa had expected the CBK to hold interest rates steady.

“I expect the MPC will hold steady before making further monetary and fiscal policy decision as it assess the effects of the previous changes in the market,” Kinuthia had told Capital Business earlier on Thursday.

However the Central Bank cites lack of effective reining in on inflation as the main reason for the recent hike. The MPC noted that although supply shocks continued to drive domestic prices upwards, demand driven inflation pressures arising from the growth of private sector credit continued to persist.

“In addition, it was noted that there were exchange rate risks emanating from uncertainty in the global financial markets due to the debt crisis in the eurozone. In order to address these risks, the Committee considered it necessary to further tighten the monetary policy stance at the margin,” the statement reads.

Inflation figures rose for the 13th consecutive month to stand at 19.72 percent in November up from 18.91 percent in October. Also in October the CBK had increased its inflation target to nine percent from five percent with a variant of plus or minus two percent meaning it would prefer an inflation peak of 11 percent.

However, the hike effectively means that commercial banks are likely to raise their interest rates to more than 30 percent as they seek to protect their profit margins. Banks have been reviewing their base lending rates with most of them quoting theirs at more than 24 percent, citing the increase in the Central Bank Rate.

Prof Ndung’u however said t that several banks had commenced discussions with borrowers with a view to restructuring loans and refinancing arrangements to avoid any threat of default.

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