Central Bank of Kenya retains its signal interest rate at 18% to cushion economy

NAIROBI, Wed. Jan 11 – The Central Bank of Kenya maintained its signal lending rate at 18 per cent, a clear sign that the economy was still facing inflation and currency-related risks. The bank’s Monetary Policy Committee (MPC) said on Wednesday it held the rate steady to allow its previous actions to help ease inflation.

This is the first time in the past five straight sittings that the MPC has retained the rate, having raised the Central Bank Rate from 6.75 per cent to 18 per cent to rein in rampant inflation and stabilise the shilling, which had depreciated steadily to hit 107 trading against the dollar in October.

It is also in line with the expectations of many financial market analysts. But the high rate has come with great discomfort to borrowers, who have to deal with higher than expected interest on their loans after commercial banks increased the lending rates to above 25 per cent. It has also kept off potential borrowers from the banking halls and slowed down consumption.

“The committee considered it necessary to maintain its current tight monetary policy stance and thus retained the Central Bank Rate at 18.0 per cent to provide time for the impact of the adjustments in the CBR to have their full impact, together with the liquidity management instruments in place,” read the statement signed by Central Bank governor Njuguna Ndung’u.

The committee warned that although inflation, which had persisted over the past year, eased slightly to 18.46 per cent in December from November’s record high of 19.73 per cent, the balance of payments pressures and their potential impact on the exchange rate remain major risks. “Continued turbulence in the global financial markets due to the debt crisis in the eurozone presents a potential risk to the exchange rate and hence to inflation.

Moreover, private sector credit growth must slow further to stem demand related inflation pressures,” said the statement. The pain of the high interest rate regime that has gripped the entire East African region on Wednesday broke to the streets in Uganda after traders and shopkeepers started a three-day strike to press commercial banks to stop raising interest rates. Commercial banks in the region have raised their lending rates in response to the aggressive tightening of monetary policy.