Central Bank ‘unlikely to lower policy lending rate this year’

The Central Bank of Kenya (CBK) is unlikely to lower the policy lending rate this year even as inflation remains on the low as decision makers will be keeping an eye on the expected increase in US interest rates.

Central banks have been under pressure to bring down the interest rate as a response to the multi-year low inflation across many jurisdictions.

Barclays head of research for Africa Jeff Gable said in an interview that the expected US rate movement combined with the uncertain nature of oil prices means that it would not make sense to cut the policy rate now only to have to raise it again by the end of the year.

Kenya’s inflation has fallen to 5.61 per cent from a 25 month high of 8.36 per cent in August, mainly due to lower fuel and electricity prices. The CBK target inflation level is between 2.5 and 7.5 per cent.

The Central Bank Rate has been held steady at 8.5 per cent mid-2013, with Mr Gable saying that the stability has been sending the right signal to the economy.

“In our forecast, it does not make much sense to cut interest rates now and six months later have to raise them again. Interest rate stability is the right message for the economy,” said Mr Gable.

The Barclays research head said the US rate changes could not be ignored.

“The global interest rate environment is going to become less easy once the US raises its rates. When this happens, a lot of people who think they don’t have anything to do with US economy are going to find that they need to raise their rates as well,” he said.

Kenya, like many emerging economies, has over the past six years seen capital inflows from the developed markets as investors went out on a search for returns that were absent in the low interest rate market in the US.

The World Bank has also warned that the US factor may end up forcing an interest rate rise in Kenya.

“With the ending of the Federal Reserve monetary stimulus, the flow of cheap capital that has been funding the current account could dry up as risk-averse foreign investors exit the region, creating volatility in the foreign exchange market and putting pressure on the Central Bank to raise interest rates,” said the World Bank in its recently released update on the Kenyan economy.

Foreign direct investment into Kenya may, however, be boosted by the prevailing low prices of commodities such as oil and minerals.

“East Africa had missed out somewhat with growth not that high and individual economies seen as smaller. This will not be the case in 2015-16, with the EAC story resonating much more now than when oil was above $100 a barrel,” said Mr Gable.