Cost of credit to stay high as policy rate is kept at 18pc
Kenyans were on Thursday left facing another month of high cost of money after the Central Bank left the key policy rate at 18 per cent, signaling its intention to keep lending rates at the current high levels.
The decision came against expectations that the bank would start the climb down from the tight monetary policy stance it has maintained since November.
Njuguna Ndung’u, the Central Bank governor who chairs the Monetary Policy Committee (MPC), said the decision had been informed by the fact that credit expansion had not slowed down enough and the nine per cent inflation target had not been achieved to warrant the beginning of an easing cycle.
“The committee observed that there is need to maintain the current monetary policy stance to ensure that inflation continues to decline towards the target and to sustain the current exchange rate stability,” Prof Ndung’u said. “The Committee, therefore, decided to retain the Central Bank Rate (CBR) at 18.0 per cent.”
The MPC said its decision was also informed by the fact that the underlying inflation rate – which excludes the food and fuel price index – remains at 9.94 per cent, above the target of nine per cent.
Official statistics show that credit expansion stood at 24 per cent in March against the month’s target of 22 per cent.
The private sector’s uptake of credit has slowed since December when it stood at 31 per cent. In January, credit grew by 28 per cent before slowing down to 26 per cent in February and 24 per cent in March.
The MPC has stated that it plans to reduce the rate of credit expansion to 18 per cent by June.
Its decision won the support of analysts who pointed at the prevailing risk of high inflationary pressure arising from the crude oil market and its impact on other prices, including food in coming months.
Exchange rate volatility also remains a key concern in the market, making the policy decision rational, said Andrew Kasaine, the portfolio manager at British American Asset Managers.
Mr Kasaine said that the shilling was bound to weaken in the coming months because of the General Election.
“Even if supported by high interest rates, sentiment would still tilt the balance in favour of a weaker shilling,” he said supporting the CBK’s decision to stay on the side of caution.
“There is a risk of the Kenya shilling weakening with a cut in the CBR. This is because the fundamentals for the shilling are weak and the elections are bound to dampen sentiments, weakening the currency,” said Mr Kasaine.
A lower CBR, he said would reduce the attractiveness of shilling-denominated assets.
Razia Khan, the head of research for Africa at StanChart, said that although the bank had anticipated that the interest rates would stay on hold, the seemingly-favourable headline CPI print for April made the decision come as a surprise to the market.
In December, the MPC raised the benchmark rate to the highest level since it was introduced in June 2006.
The CBR rose by a total of 12.25 percentage points to 18 per cent where it has since remained as the MPC keeps a close watch on inflation and the exchange rate.
The MPC ramped up the benchmark rate aggressively from last October starting with four percentage points to 11 per cent and again to 16.5 per cent in November before ending the year at 18 per cent.
There has been uncertainty on the Kenya shilling exchange because fundamentals – such as the current account deficit reflecting a huge import-export gap – pointed towards a weak local unit if the benchmark rate was low. The deficit is now at 13.6 per cent.
Earlier, Citigroup had concluded that the MPC would leave the policy rate unchanged in their meeting yesterday, pointing to the position of a tight monetary policy stance by the International Monetary Fund (IMF) under the three-year Extended Credit Facility, under which Kenya has since January last year received more than $400 million.
“In the context of the caution expressed in the Letter of Intent and the IMF ECF Review, it seems likely the MPC will err on the side of caution and leave the policy rate on hold. Such a decision would be supported by the recent increase in fuel prices and continued uncertainty around the food harvest outlook.