MPC expected to keep key lending rate steady

The Central Bank of Kenya (CBK) said its Monetary Policy Committee (MPC) is unlikely to increase the base lending rate at a meeting Monday morning, offering relief to millions of borrowers.

CBK Governor Patrick Njoroge said the rise of inflation in the past three months was a supply side problem that is mainly driven by shortage of food, making a review of the benchmark unlikely.

The benchmark rate has remained unchanged at 10 per cent since last September, effectively pricing lending rates at a maximum of 14 per cent in line with the capping of interest rates at four percentage points above the Central Bank Rate (CBR).

“We don’t see any strong reason to alter the base rate,” Dr Njoroge said on the sidelines of the just-concluded Africa CEOs forum in Geneva.

“Remember the inflation is mainly food-driven due to the drought, not because of higher appetite for imports or increased money supply. We anticipate a drop in two months as the rains resume,” Dr Njoroge said, adding that the shilling is relatively steady against the dollar.

Dr Njoroge said the central bank was more concerned about the slowdown in private sector credit growth than inflation pressure, which it considers temporary.

Lending to businesses and individuals grew a paltry 4.3 per cent in the year to December, down from a 20.6 per cent a year earlier, making it the slowest growth in more than 10 years.  The credit squeeze means less money supply in the economy and sluggish demand for goods and services.

The Kenya Bankers Association blames the squeeze on interest rate controls that took effect last September and has seen banks shun private borrowers perceived to be risky.

The CBK considers a credit growth rate of between 12 and 15 per cent ideal for purposes of stimulating economic growth.

The MPC meets every two months to review the rate. Inflation hit a four-year high of 9.04 per cent last month in the wake of a rally in food and fuel prices.

The CBK now expects inflation to fall within the government’s preferred range of between 2.5 per cent and 7.5 per cent as food supply picks up with the onset of rains next month.

Dr Njoroge said the CBK foresees a relatively stable forex market in the medium term, citing a narrower current account deficit and a sizeable foreign currency reserve to cushion the economy from any unforeseen major shocks.

The shilling opened the year at Sh102.50 to the US dollar but rapidly sank to trade at a low of Sh104 end of January before bouncing back to Sh102.90 last week.

Core inflation or underlying inflation, which leaves out volatile goods such as food and fuel, declined in February to 3.7 per cent from 4.5 per cent a month earlier, offering the CBK yet another reason to hold the base rate.

Interest rate controls were introduced following a public outcry over high cost of loans that lined the pockets of banks with double-digit profits growth even as other sectors of the economy tanked.