CBK expected to hold policy rate with eye on election

The Central Bank is expected to hold steady the cost of loans as it awaits uncertainties raised by the General Election to clear, economic analysts have predicted.

The Monetary Policy Committee (MPC), the Central Bank of Kenya (CBK’s) policy setting organ, is widely expected to hold the benchmark lending rate at 9.5 per cent in Tuesday’s sitting, according to economists interviewed by the Business Daily.

Political noise has made it difficult to pick up signals that would give the regulator the cue to adjust the Central Bank Rate (CBR) and the most prudent choice is to hold it steady, the analysts argued.

“There is a lot of anxiety and very little economic activity is going on including services,” said Nelson Wawire, the chair at Kenyatta University’s macroeconomics department.

The last seating January saw the CBK reduce the rate to 9.5 per cent from November 2012’s 11 per cent rate.

Low production and volatility of the shilling are indicators that should give policy makers the cue to adjust rates, but given that they are coming during the election season, the best move would be to take action later when their movements reflect fundamentals, Mr Wawire said.

Razia Khan, Standard Chartered’s head of research for Africa said that expectations are that the cost of living should go down in the year which ordinarily makes the case for a base rate cut, but the prevailing uncertainty rules out such a move.

“While the inflation profile that we broadly expect in Kenya (and where CPI should eventually settle), arguably allows some room for further easing from a policy rate of 9.5 per cent, near-term uncertainty suggests that there is a good chance that the CBK may opt for a more cautious approach, and keep interest rates on hold at the March MPC meeting,” said Ms Khan in a statement.  

As at February, the rate of inflation stood at 4.5 per cent, a slight increase from 3.67 per cent in January, but in the presence of a general election it may be difficult to know if fundamentals are causing the increase or it is an election-related, a one-off affair.

“Were these results outliers, or symptomatic of a broader, more worrying trend?  The MPC may need more time, and a normalisation of activity post-election, to assess this,” said Ms Khan’s statement.

Maintaining rates also takes into account who Kenya’s next president will be and how he plans to govern the country. Kareithi Murimi, an economist and consultant, said that CBK takes into account the deficit when making the choice to change the base rate.

Funding the deficit requires the government to borrow through Treasury bills and a lower rate means saving the taxpayer money. But implementation of the devolved government structures may require more funds than earlier anticipated, piling pressure on interest rates.

“Things like the wage bill are not yet predictable,” said Mr Murimi adding that the MPC will most likely maintain the MPC at 9.5 per cent.