Acting Finance Minister Robinson Githae/FILE
Githae said he will open up talks with banks next week to formulate a way of cutting rates ahead of Parliament’s debate on amending the Finance Bill and the Banking Act.
“Members are telling me that if I want them to withdraw the amendments to the Banking Act to cap interest rates, the banks must show that they are determined to reduce interest rates,” he said.
In the last quarter of 2011 interest rates soared from an average of 17 percent to 26 percent, with the Central Bank Rate maintaining at 18 percent for the last two months.
Central Bank of Kenya (CBK) Governor Njuguna Ndung’u said the recent positive signs of rates lowering in the auction of government securities and easing inflation indicates a reduction in interest rates.
“We have stabilised the exchange rate so now inflation expectations have come down so interest rates will start reading the same script. Our inter-bank rates have come down to about 10 or 11 percent,” he said.
Githae and Ndung’u were attending a high level policy dialogue on Tuesday involving Central Bank governors from across East Africa discussing the effects of inflation on their respective economies.
All countries in the region with the exception of Rwanda experienced inflationary pressures seeing rates hit double digits.
Food and fuel prices were major drivers of inflation in the region, with world oil prices accounting for 20 percent and 26 percent of inflation in Kenya and Uganda respectively.
The currency wars in developed markets such as the US and Europe led to weakening exchange rates regionally, equally affecting inflation.
Developments in the Eurozone saw the Kenyan currency depreciate by 19 percent, Uganda by 34 percent and Tanzania 13 percent.
Monetary expansion though good for financial inclusion, had a negative effect on inflation rates as well based on credit growth in the private sector, which Githae said reached 36 percent in October last year.
“The strong domestic private demand spilled over to imports, thus causing a deterioration of the current account of the balance of payments and further exacerbating the weakening of the exchange rate, thereby adding to a further round of inflationary pressures,” he said.
Unlike its regional counterpart, Rwanda, Kenya’s agricultural output is very volatile, partly due to bad supply chains, poor storage facilities and reliance on rain-fed agriculture.
Central Bank of Rwanda Governor Claver Gatete said the central bank in collaboration with the government decided to tackle inflation from several fronts by coordinating and harmonizing its policies and improving its exports by boosting domestic food production.
Such measures helped curb further surging of the inflation rate in the country which touched its highest level of 8.3 percent by the end of 2011.
“Our projection for inflation by the end of this year is 7.5 and our GDP is projected at 7.6 percent. It’s very important to focus on the sources of inflation. If the government does its part then it is easier for the monetary policy to have effect,” Governor Gatete said.
