Analysts welcome CBK rate hike

December 2, 2011

, NAIROBI, Kenya, Dec 2 – While Thursday’s move by the Monetary Policy Committee (MPC) to raise the base lending rate by 1.5 percent to 18 percent signifies Central Bank of Kenya’s intent to decisively rein in inflation, a financial analyst has said the decision also raises questions as to whether another policy hike would be useful.

Standard Chartered Bank Head of Regional Research for Africa Razia Khan argued that since inflationary pressures which have been rising persistently this year soaring to 19.72 percent in November 2011 are expected to soon start easing, the need for a further tightening should also be considered.

“Given that we expect inflation to peak close to current levels, before we start seeing more of an improvement over the course of 2012, it does call into question whether we need to see further tightening in this cycle, beyond the move seen today,” Khan said.

The Central Bank Rate (CBR) has risen by 11 percent in the last two months and while it has resulted in a stabilising shilling which has gained 16 percent toSh89.80, the tightening has not had the intended impact on inflation which in November rose for the 13th straight month.

However, there are those that opine that before determining whether a policy increase would be necessary, CBK would also have to consider the causes of inflation, which is largely been driven by high food and fuel prices.

This for instance is because should the cost of importation continues to be high due to the rising cost of credit and thus passed on to the consumers, then the pressure on food items is likely to be maintained.

“What this means is that inflationary pressures are expected to continue until the influence of these factors on the inflation rate is contained,” explained Genghis Capital Research Analyst Renaldo D’souza.

In addition, D’souza said the need for further tightening will depend on other factors such as the exchange rate and the price level in the near term.

“The cost of domestic borrowing will also be a major consideration. A review of recent T- Bill auction results will show you that the CBK is battling with a high cost of domestic borrowing and further tightening is likely to increase it borrowing costs further,” he added.

He however acknowledges that if the costs of food and fuel start to decline, the CBK might think against tightening further.

“All said, I think that we should review this further as weeks go by and we see the full impact of the policy rate before we can conclude on what the CBK should do,” he concluded.

And while the market waits to see what action the MPC will take come January 1, 2012 in line with its resolve to continue assessing the impact of its policy decisions on the market, it is anticipated that the appreciating local unit should also help relieve the pressure on commodity prices.

As the inflation starts its deceleration, then the country can also expect the interest rate environment to ease as early as the second half of 2012.

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