Relief as CBK retains indicative rate at 18pc

January 11, 2012
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, NAIROBI, Kenya, Jan 11 – As widely expected, the Central Bank of Kenya (CBK) on Wednesday retained its indicative rate at 18 percent saying this would provide time for the monetary policy measures it has taken to have their full impact on the market.

The decision was taken against the backdrop of an observation that the market is regaining the confidence in the economy primarily because the tightening of the policy stance has begun to have the desired effect.

“The committee considered it necessary to maintain its current tight monetary policy stance and thus retained the Central Bank Rate at 18.0 percent to provide time for the adjustments in the CBR to have their full impact together with the liquidity management instruments in place,” MPC chairman and CBK governor Prof Njuguna Ndung’u said in a statement.

This will be welcome news for borrowers as lending rates are not expected to edge upwards this month.

The market had largely expected the rate to be held constant given that the twin problem of soaring inflation and volatile exchange rate had begun to be contained.

Those analysts that favoured the maintaining of the CBR at 18 percent had argued that the economy cannot sustain the current interest rate regime which averages 24 percent.

“Last month (December) we had the first reduction in the inflation rate. I’m expecting a further reduction because of what’s happening with the fuel prices, and I think that’s enough for the Central Bank to sit back this time around. It would be overkill if they pull the trigger again,” financial analyst Aly-Khan Satchu had told Capital Business in an earlier interview.

However, there were those like Genghis Capital Research and Investment Analyst Evans Mugi who felt that relaxing the existing degree of monetary restraint would inappropriate at this time citing the persisting inflationary pressures and the ‘un-anchored’ inflation expectations.

The MPC however seemed to have been of a contrary opinion instead choosing to be optimistic that the dis-inflationary trend would continue.

“The committee showed that inflation is projected to ease further in early 2012. Furthermore, expected improvements in food supply will result in lower commodity prices,” the team observed while also pointing to other positive developments in the market.

While experts will be keenly watching how the market reacts to this announcement, others think that ‘the language of the MPC provides important clues as to what to expect next.’

Standard Chartered Bank Head of Regional Research for Africa Razia Khan says the impact of the volatile forex rate on the balance of payment and the unfolding euro crisis are key concerns.

“The warnings on the risks to the forex rate that might be posed by the balance of payments situation, as well as the euro area crisis, suggests that the CBK will not be in any hurry to cut rates,” Khan opined.

But while underscoring the improvement of the price outlook and the easing inflationary pressures, the economist projected cuts of at least 400 basis points (bps) later this year if the trend continues.

“Should current trends persist, we still expect 400bps of easing this year – the start of what will probably be a multi-year decline in interest rates that may well take us all the way through to the end of 2014 or even 2015,” she asserted.

In addition, should there be any pressures that may arise from deterioration in Kenya’s trade balance; she says the currency can further expect support from eventual inflows into the fixed income markets.

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