Loan borrowers have trained their eyes on the banking sector regulator’s first policy meeting of the year next week to find out whether they will benefit from a cut in interest charges.
The Central Bank of Kenya (CBK’s) monetary policy committee is expected to meet on Thursday with expectations heavy that it will cut its benchmark rate as a signal to commercial banks to reducing lending rates.
The central bank rate (CBR) currently stands at 11 per cent, a rate that is substantially above the inflation rate which dropped to 3.20 per cent in December.
The shilling has also remained fairly stable at about a range of 86 units to the dollar backed by high levels of foreign currency reserves, which is also likely to give the regulator more confidence to reduce its policy rate.
Analysts ruled out a rate increase in next week’s sitting.
The rate of inflation, liquidity, GDP growth and the exchange rate are measures that the CBK checks when determining the CBR, and most of these point to a reduction.
Inflation has reduced gradually from 19.72 per cent in November 2011, the month before the tripling of the CBR to 18 per cent from six per cent.
Francis Mwangi, head of research at Standard Investment Bank, said it is difficult to pinpoint with confidence CBK’s likely action but said the inflation rate and GDP growth rate rule out an increase.
“There is definitely no justification for an increase,” said Mr Mwangi.
Maintaining of the 11 per cent rate until the next meeting in two months time, would send a signal of stability, Mr Mwangi said. Other analysts said the CBK could lower the policy rate to single-digit levels.
“However, there is a downside risk from the widening current account deficit. Accordingly, the rate cut will be limited to about 100 basis points,” said Faith Atiti, a research analyst at NIC Securities.
Safeguarding stability of the shilling was a key reason for Central Bank’s raise of the CBR in December 2011.
The repo rate stands at 6.415 per cent from 9.95 per cent before the last cut in November, which indicates that there is liquidity in the market that is one of the measures that the CBK uses.
Johnson Nderi, a research analyst at Suntra Investment Bank, said that the government needs to borrow heavily and lower rates will reduce the cost of borrowing with the byproduct being a drop in borrowing costs for consumers.
The CBK had said that the international oil prices and global markets’ performance will have an effect on the MPC’s decision.
“The committee noted that the impact of continued volatility in international oil prices, the spill-over effects of the slowdown in global economic growth on the domestic economy, and the balance of payments pressures emanating from a high current account deficit remain the main risks to the macroeconomic outlook,” said CBK governor Njuguna Ndung’u after November’s rate cut.