Private sector sees stable prices as CBK retains rate

The private sector expects the exchange and inflation levels to remain stable in the coming months, a new survey by the Central Bank of Kenya shows.

While retaining the policy interest rate at 8.5 per cent for the eighth straight month, CBK’s Monetary Policy Committee said that businesspeople were optimistic about economic growth for this year.

“The MPC Market Perception Survey conducted in February 2014 showed that the private sector expects inflation and the exchange rate to remain stable for the remainder of 2014. Furthermore, the private sector firms sustained their optimism for a strong growth in 2014,” said Central Bank governor Njuguna Ndung’u in a statement after the MPC meeting.

Most analysts have projected GDP to be at over five per cent this year.

The MPC said that loan applications had risen by 20 per cent in January to 111,486 compared to 94,259 in December last year. Out of these, 102,287 applications were processed compared to 85,899 the previous month.

“These were distributed across the key sectors of the economy. The annual growth in private sector credit stood at 20.47 per cent in January 2014 compared with 20.08 per cent in December 2013,” Prof Ndung’u said.

StanChart head of research in Africa Razia Khan said that the Kenyan economy was ready for growth, with the loan approvals being one of its major indicators.

“The economy also appears primed for growth. Loan applications and loan approvals are strong.  Private sector credit growth is running just over 20 per cent year-on-year,” she said.

The MPC noted that overall inflation continued to decline in February and remained within the target range, while exchange rate stability was maintained.

It stood at 6.86 per cent, down from 7.21 per cent in the previous month – which is within the upper band of the prescribed 2.5-7.5 per cent range.

The price level has remained largely in single digits since the second half of 2012, due to absence of supply shocks, a stable exchange rate and a cautious monetary policy.

The Central Bank sees the monetary policy as supporting a stable price level including core or non-food non-fuel inflation.

“This is an indication that the monetary policy stance has continued to support a stable inflation rate and that private sector credit growth during the period was non-inflationary,” said Prof Ndung’u.

MPC reckons that loans to businesses have grown to nearly Sh2 trillion or about half of the gross domestic product without pushing prices up.

Holding the rate at 8.5 per cent shows CBK is targeting further reduction in inflation especially because of risks posed by credit growth, instability in oil producing countries and tapering of the economic stimulus in the US.

“Perhaps this (economic and credit growth) is where risks are most pronounced.  While inflation is well-behaved for now, we do see risks further out especially if growth momentum is sustained as we expect,” said Ms Khan.

She said she saw the CBR being put on hold through to the middle of the year, with the need for modest tightening becoming evident in the next financial year, which begins in July.