Falling inflation limits scope for CBK interest cut

The Central Bank could hold interest rates steady in Tuesday’s bi-monthly meeting to avoid upsetting the markets, analysts have predicted.

The Monetary Policy Committee (MPC) meets Tuesday against a background of falling inflation and stable exchange rate of 86.6 units to the dollar.

Analysts said the stable macroeconomic outlook called for holding of the Central Bank Rate at the current 8.5 per cent.

Inflation stood at 7.15 per cent last December, having fallen for the third consecutive month as the effects of the Valued Added Tax (VAT) dissipated.

“Risks seem relatively benign at the moment, and we expect that the CBR will be on hold in January,” said Razia Khan, the head of research on Africa at StanChart Plc in London.

She said the effect of the VAT on prices had disappeared faster than expected.

“The pleasant surprise is that much of the inflation pressure, seen in the immediate aftermath of the VAT Act, seems to have dissipated faster than expected,” said Ms Khan.

Peter Anderson, the chief investment officer at Old Mutual Asset Managers in Nairobi, said the reduction of pressure on prices after the implementation of the VAT Act meant the MPC would hold the policy rate steady.

“The VAT impact on inflation has receded. We don’t see a strong inflationary pressure going forward. Inflationary expectations are well grounded and the CBR is likely to be held in the coming MPC meeting,” said Mr Anderson.

Ms Khan said Kenya will always need to watch food prices, despite the current fall in inflation.

“More significantly, despite the restatement of the current account deficit at the last MPC meeting, the country’s external balance remains weak,” said Ms Khan.