Interests to remain high as CBK keeps its rate at 18%

NAIROBI, JAN, Wednesday 01, 2012 – Central Bank of Kenya got economists flat-footed when it left its signal lending rate untouched at 18 per cent today.

Many analysts had expected a downward revision of the rate, known as the Central Bank Rate (CBR), but government monetary policy makers appear to still keen on keeping the rates high to tame inflation, which declined to 18.3% in January from 18.9 the previous month.

The Monetary Policy Committee (MPC) said after a meeting today retaining the CBR steady, the second time this year, is aimed at consolidating the gains made to stabilise the local currency and curb inflation.

This kills any hope of a reduction in the cost of loans currently, given that commercial banks use the CBR to set their interest rates. The bank said that while inflation is expected to keep falling, the risks remain while credit growth needs to slow further.

“Inflation is expected to continue easing in the coming months on account of the current monetary policy stance, stability of the exchange rate, decline in oil prices, and continued easing of demand pressures with the slowdown in private sector credit growth. Reduced credit to finance imports is also expected to ease pressure on the exchange rate,” the bank said in a statement.

CBK said pressures from balance of payments and continued uncertainty in global financial markets due to the eurozone crisis, remain the main risks to inflation and the currency. The bank also cited forecasts for dry weather in most parts of the country and expected frost in February as other risks to food supplies, while geopolitical risks could interrupt oil supplies and affect fuel prices globally.

Already, food and petroleum prices have eased marginally on account of a stronger Kenyan shilling and reduced petroleum prices in the international market, while inflation slowed to 18.31 per cent in January down from 18.93 per cent in December last year.

The local shilling, which had sunk to historic lows of 107 against the dollar last year, seems to have stabilised at the Sh85 average trading against the dollar. The 18 per cent rate is expected to entrench the tight liquidity situation in the market which is feeling the high cost of credit.