NAIROBI, Kenya Jul 8 – Increase in the Central Bank of Kenya (CBK) Lending rate to 11.50 percent from 10 percent will only offer temporary relief to the local currency, according to money market experts.
Standard Investment Bank Research says this due to the persistent weakness in current account deficit and slow foreign capital inflows given the current global wide risk aversion.
The research firm says the increase also dents economic growth outlook for 2015.
Imports increased by three percent to Sh355.7 billion where as the value of exports shrunk by 2.3 percent to Sh131.5 billion in the first quarter of 2015.
Commercial Bank of Africa (CBA) Treasury Dealer John Njenga says increasing interest rates does not solve the current account deficit citing that more needs to be done in the import and export disparity.
The same sentiments were exuded by Standard Chartered Bank Chief Economist Razia Khan who said the latest measures will benefit the local unit in the near term, particularly given the authorities’ willingness to address excess liquidity in the banking system through more fine-tuned liquidity-management operations.
READ: CBK raises rates in reaction to market shocks
“The scale of the rate hike, so soon after a previous outsized hike, will also send a strong message to markets. Nonetheless, with the Kenya Banks Reference Rate (KBRR) which is reset every six months, raised only 133 basis points from its January level, to 9.87 percent , the authorities may need to do even more to prove their willingness to cool a potentially overheating economy,” Khan said.
In Wednesday’s trading session, the shilling gained marginally against the dollar trading at 100.20 against 100.40 to the dollar compared to 100.55 against 100.65 recorded at the close of business on Tuesday.
Senior Portfolio Manager at Pan Africa Asset Management Jonathan Wakahe says existing floating rate loans will be affected by the rise in the KBRR that was raised to 9.87percent from 8.5 percent , as will any new facilities – both floating and fixed taken out subsequent to the hike
“It is difficult to tell precisely how the banks will react, but I anticipate that, on average, the full differential in the KBRR (133 basis points) will be passed on to new fixed and floating and existing floating rate borrowers; I expect that this will dampen demand for credit, at least in the near-term,” Wakahe explained.
He said higher domestic interest rates should increase the attractiveness of the shilling, attracting foreign capital and leading to an appreciation of the local unit.
“The shilling should begin to gain immediately; the magnitude of yesterday’s hike suggests to me that we will see a retracing to around Sh95/USD in the next couple of weeks or thereabouts,” he added.