Expert predicts further drop in interest rates

September 14, 2012
Oil prices have increasingly put pressure on the import bill which last year went completely off the scale when the drought hit./FILE

, NAIROBI, Kenya, Sep 14 – Consumers can look forward to further easing of interest rates over the next few months, an economist at Standard Chartered PLC (StanChart) has said.

The Regional Head of Research for Africa at StanChart, Razia Khan, said last week’s move by the Central Bank of Kenya (CBK) to cut the Central Bank Rate to 13 percent was a surprise far exceeding the bank’s predictions, but she does not see the cuts being as aggressive in the future.

“With one more meeting in November we could see 150 basis points and thereafter maybe another 150 to take us to 10 percent in January,” she predicted.

Similarly, the deceleration of inflation over the last three consecutive months paints a more positive picture for GDP growth on the back of expanding credit, despite the uncertainty that looms ahead of the elections.

“Our forecast suggests that inflation could dip to the 5 percent range. I would not be surprised if we got to 3 percent,” she said.

Still, Khan says the CBK needs to tread cautiously in reduction of interest rates given the recovering economy, widening current account deficit (CAD) now at 12 percent and upcoming elections.

Boosting exports is imperative, she adds, in order to see the country become more competitive.

“Kenya needs to go for export growth in a big way. The situation is getting to the level where Kenya will need to export almost three times as much as it is exporting now to be able to afford what it is importing,” she warned.

Oil prices have increasingly put pressure on the import bill which last year went completely off the scale when the drought hit.

Despite the country’s fairly good macroeconomic position now, the broadening CAD should be a reason for pause Khan said, as it will pose a risk for the shilling.

“The extent to which we saw the long established macroeconomic stability slip last year and speed with which it went is not a situation that Kenya can risk again,” she warned.

Late last year, the local unit plummeted to a low of Sh107, based largely on the pressure from the CAD.

The effects of a depreciating exchange rate occurring again will have a greater impact on the poor, with food prices still relatively high and the country being a net importer of grain.

However, exploring options such as services exports to our growing neighbours in South Sudan for example, Khan says will compensate for the declining exports to the ailing Eurozone.

“Services are cheaper to put in place and see the take off of it. If you look at what is already been achieved in terms of ICT development there is no reason why Kenya shouldn’t continue being the services hub of the sub region,” she said.

Eurozone exports currently account for 17 percent of Kenya’s exports.

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