Genghis Capital Research and Investment Analyst Evans Mugi said the move is expected to trigger some gains on the Kenyan shilling but argued that the current inflation is partly due to the supply side constraints set off by a prolonged drought.
“We note that tighter monetary policy is unlikely to directly influence food prices – especially since current inflation is linked to supply-shocks and higher “pass through” from global commodity prices, rather than money supply growth,” Mugi pointed out.
The rate hike, which is the highest since the introduction of the facility in June 2006, came barely a month after another four percent increase to 11 percent in the Central Bank Rate (CBR) and demonstrates the CBK’s willingness to stabilise the situation, which it has not been able to effectively do in the last few months.
In October, inflation rate rose to 18.9 percent from 17.32 percent despite assurances from the government that it would decline. The local unit on the other hand last month dipped to a historic low of 107.14 against the dollar.
But although food costs might not be immediately impacted, the decisive policy tightening is expected to come in handy in addressing the second round effects of inflation.
The same however cannot be said of the interest rates which are expected to rise beyond 20 percent and bring with it default risks.
To minimise the risks and protect themselves, Mugi forecasted that a shift in the banks’ lending portfolio might be witnessed as they opt to lend to the government, as opposed to riskier firms and individuals.
Should this happen, then manufacturing and real estate will most likely be affected by the reduced and expensive credit, a development that will directly impact output and the real Gross Domestic Product (GDP) growth.
But even as the impact on these industries remains inevitable, questions are being raised on what effect the availability of credit to the private sector has had on the inflationary pressures.
While the International Monetary Fund reckons that ‘excessive credit growth’ has contributed to the acceleration of inflation hence their call for the tightening of the policy stance, there are others who feel that this was not a factor.
“In our view, recent structural shifts in the economy, and Kenya’s success in reducing financial exclusion, make it difficult to argue that recent credit growth has been excessive,” opined Standard Chartered Bank Head of Regional Research for Africa Razia Khan.
And as the debate rages on, market analysts concur that Kenya’s GDP will take a big hit and put the growth rates at conservative figures of below five percent this year.
Their projection is validated the data from the Kenya National Bureau of Statistics which indicates that Real GDP growth for the second quarter running from April 2011 through to June 2011 declined to 4.1 percent compared to 4.6 percent registered in the same period last year.