CBK should cut indicative base rate – expert

January 3, 2012
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, NAIROBI, Kenya, Jan 3 – A financial analyst is now proposing that the Central Bank of Kenya (CBK) considers implementing cuts in the indicative base rate to enhance the potential for future economic growth.

Renaissance Capital Global Chief Economist Charles Robertson argues that if implemented early enough and done at a measured pace; the cuts would enable the CBK to achieve its objectives of taming inflation and stabilising the currency without jeopardising economic growth.

“Cuts in rates in 2012 should allow the Central Bank to manage the currency, while experiencing the benefits of low inflation, a better current account position, without risking a crash in Gross Domestic Product (GDP),” he noted.

The Central Bank Rate is currently at 18 percent, having been reviewed repeatedly since October last year.

While it has worked to stabilise the local unit from a historic low of Sh107 to the dollar to the current Sh85, interest rates have also soared from an average of 17 percent to the current 26 percent thus resulting in a credit crunch.

Robertson however said that the currency is now too strong and this might impact the country’s quest to build a more competitive export economy.

“Kenya needs to build a broader more competitive export economy and the experience of many countries suggests that weaker currencies – for example closer to Sh100 to the dollar – rather than overly strong currencies (such as Sh85 versus the dollar) help most,” he said.

“A sharp slowdown in the economy can also scare the markets, as India is now demonstrating,” he added.

Robertson added that if need be, the shilling can be supported by a reduced import bill particularly if oil prices weaken early this year as they are projected while the current account deficit should also shrink.

While acknowledging that this will not be an easy process to manage at a time when the eurozone crisis continues to drag on, he is expressing confidence in Central Bank’s ability to handle the challenges as it has redeemed itself.

“Kenya has taken a different stance. A brave change of heart in October 2011 saw interest rates soar. This has had a radical effect on the currency. From extreme weakness, the shilling has strengthened dramatically,” he praised.

His remarks were contained in a commentary where he compared Kenya’s economic developments in 2011 with those of Turkey and India.

“In all three countries, currencies have come under great weakening pressure. In all three, inflation has risen strongly. In all three, the central banks suffered criticism. But only in Kenya has policy changed so dramatically that 2012 is likely to be a quite different story,” he noted.

The three countries, he observed, share a dependency on energy imports, were faced with high food prices and also had in 2011 seen a low interest rates regime that had encouraged very high credit.

“Each country has taken a different response to these pressures. India started a cycle of gradually raising interest rates through 2010-11 which has only just ended. The process was too slow to please the market and the Indian rupee has recently hit extremely weak levels,” Robertson explained.

“In Turkey the central bank was reluctant to raise interest rates at all, and has now embarked on a policy of very wide interest rate bands (from 5.75-12.5 percent at the time of writing) in a bid to stop currency depreciation whilst not killing growth. Again the market has not been impressed, and the currency has been under great pressure,” he added noting that of the three only Kenya had taken bold steps to address the situation.

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