Inflation fall sets stage for rates cut

The drop in inflation rate and increasing need to ease the cost of borrowing is likely to pressure the Central Bank to cut interest rates in Thursday’s monthly policy meeting, analysts have said.

The Stanchart head of research for Africa Ms Razia Khan told the Business Daily that the gap between the policy lending rate and inflation has widened enough to warrant an interest rate cut.

“Inflation is more definitively on a downtrend  it’s not just about the high base, and with the gap between the CBR (18 per cent) and inflation (10.05 per cent and falling), we think there is an even stronger case to start the easing cycle now,” said Ms Khan. 

Inflation for the month of June dropped by more than two percentage points to 10.05 per cent from 12.22 per cent in May according to figures released on Friday by the Kenya National Bureau of Statistics (KNBS).

Ms Khan said Kenya’s inflation rate for June was better than expected, with the month on month inflation easing 0.8 per cent. “This is about as favourable an outcome as might have been hoped for,” she said.

The CBK has been reluctant to cut rates in preceding months and instead focusing on  the strength of credit demand in April, and later turning focus on core inflation.

Analysts however say that the case for lower rates is now stronger.

The Central Bank has a short term inflation target of nine per cent against the current 10.05 per cent.

“It will not be in the interest of the economy to hold interest rates at 18 per cent for more than seven months given that inflation is moving towards single digits,” said Mr Samuel Gichohi, the business development manager and research analyst at NIC Securities.

Mr Gichohi said it was about time that the policy makers dropped interest rates by even the smallest margin to show support for economic growth.
The prices of food, fuel, electricity and public transport costs dropped all playing a role in the favourable outcome with little price increases in other areas.

The Central Bank last year raised interest rates to 18 per cent in December 2011 from seven per cent in September to arrest foreign exchange volatility after the shilling lost more than 30 per cent of its value to trade at 107 against the green back in October 2011 from 83 in January 2011.

“A rate cut by at least 100 basis points is valid as inflation outlook is largely subdued while food and oil prices have embarked on downward path and the exchange rate has stabilised, “said the CFC Stanbic head of research for Kenya Phumelele Mbiyo.

Mr Mbiyo said that unlike last year when there was drought and food prices were escalating calling for need to import food, this is not the case and that exchange risks are lower.

Commodity prices have also been dropping on the international scene since April 2012 helped by poor demand from the developed countries and a stable shilling.

The falling Treasury bill rates have since assumed an upward trend with both the 91 day and the 172 day bills rising last week.
rotini@ke.nationmedia.com