Experts predict drop in CBK base rate

April 4, 2012
Experts predict drop in CBK base rate/FILE

, NAIROBI, Kenya, Apr 4 – As the Monetary Policy Committee (MPC) prepares to meet on Wednesday, analysts are unanimous that the Central Bank of Kenya will cut the indicative base rate, albeit marginally.

Genghis Capital Research Analyst Evans Mugi opines that declining inflation and a slowdown in credit to the private sector point to the easing of demand pressures raising hopes of a modest easing of the Central Bank Rate (CBR).

“Monetary supply has gone down; our estimates are that net domestic assets have decreased to growth rates of about 14.98 percent which compares to about 26 to 28 percent in February of last year,” Mugi explained.

“What that tells us is that the tightening of policy is working and obviously the Central Bank would want to let interest rates come down for the sake of economic growth,” he added.

Should the MPC opt to relax the existing degree of monetary restraint, it will mark the first time in seven months that the rate, which is currently at 18 percent, has come down.

Mugi says this would be a signal to the market that the CBK believes that the upside risks to inflation are lower opening the way for further cuts in coming months.

“That would also firm up the private sector belief that interest rates are going to come down. The effect of that is that commercial banks will start cutting their base lending rates to track this move,” he argued.

The CBK has held the benchmark rate constant at 18 percent in the February and March 2012 as it works towards taming the inflation.

But while inflation has responded in the last four months from 19.72 percent in November 2011 to 15.61 percent in March 2012, there are still those who are adopting a cautious approach.

Renaissance Capital Economist for Sub Saharan Africa Yvonne Mhango says that given the concerns about the susceptibility of the shilling to depreciation pressures and the International Monetary Fund warning to the government not to be quick to relax the stance, CBR will be retained at 18 percent.

“We are expecting the MPC to keep the policy rate unchanged at 18 percent following the cautionary statement from the IMF not to cut rates too soon and the softer than expected slowdown of inflation in March to 15.6 percent YoY (year on year),” she said adding that they were expecting an inflation rate of between 14 and15 percent.

But even with the divergent views, there’s consensus that the country should begin to see cuts begin effected from mid this year when there’s clear evidence of a sustained down trend in inflation.

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