Central Bank avoids market upset with rate decision

The banking sector regulator has held its policy lending rate at 8.5 per cent, indicating a reluctance to upset the markets by tweaking interest rates, which influence the direction of exchange and interest rates.

The central bank’s Monetary Policy Committee (MPC) in a statement pegged its decision on the relative stability of the currency and an inflation rate that is still within its target.

The MPC, which held its bi-monthly meeting Tuesday, said it would continue to monitor any emergent risks that may impact on price stability.

“Inflation has remained within the current allowable margin of 2.5 per cent on either side of the government’s medium-term target of five per cent while exchange rate stability was sustained. The government domestic borrowing programme was within target and was therefore not driving or exerting pressure on interest rates,” said CBK.

The MPC noted that the shilling rate has been stable in the past two months, supported by effective liquidity management and resilient inflows from the diaspora.

The move by the regulator was widely expected, reflected by the quiet currency market in the lead-up to the meeting, and after the announcement in the afternoon.

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Movements in short-term interest rates were aligned to the Central Bank Rate (CBR), while sustained Open Market Operations continued to support the stability in the interbank market, added CBK.

The regulator also noted that the banking sector remains “solvent and resilient,” with private sector credit growing at 13.5 per cent in July compared to 12.7 per cent in June, and distributed across all key sectors of the economy.

The market had factored in the expected holding of the rate by CBK hence the stability of the local currency, said Bank of Africa dealer Robert Gitobu.

“The rate would have had an impact of strengthening the shilling if it were increased. Some buyers had kept off the market anticipating the possible appreciation of the shilling in case of a hike in the rate, but now we expect the local currency exchange rate to be based on fundamentals,” said Mr Gitobu.

The shilling was stable in trading on Tuesday, quoted at 876.45/55 units to the dollar with little movement from the morning rates.

External risks pose a threat to the economy, with the MPC noting that economic activity in the Eurozone remains weak while there is the possibility of an escalation of instability in the Middle East and Northern Africa (MENA), which is a key market for Kenyan tea.

The instability in the MENA region also had the effect of raising international oil prices between June and August, leading to an increase in domestic fuel prices.

Commercial Bank of Africa dealer Joshua Anene said these external risks and the fear of triggering a flight of funds from Kenya in case of a rate raise most likely informed the decision to hold the rate, since all other economic indications pointed to the possibility of a cut.

“A hike would make the shilling denominated assets less attractive,” said Mr Anene.