Kenya central bank holds rate at 18%

Published Apr 4, 2012

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Kenya's central bank held its lending rate (CBR) at 18 percent on Wednesday, saying inflation was still above the government's short-term target of 9 percent and that private sector credit growth had still not declined as required.

Following are analyst and trader reactions:

STUART CULVERHOUSE, ECONOMIST, EXOTIX

“As we expected. Despite the fall in headline inflation, I think there are several other factors that limit their room for manoeuvre at the moment. I think rates should remain on hold until third Quarter.

ALEX MUIRURI, FIXED INCOME ANALYST, AFRICAN ALLIANCE INVESTMENT BANK MPC

“The policy rate will continue to remain unchanged until there's a significant decline in private sector credit growth and a downward trend in core inflation rates. The monetary policy stance still remains tight with sporadic injections through forex injections as the Central Bank aims to shore up its foreign reserves.

“Despite the decline in shilling volatility and downward trending headline inflation numbers, central bank can't afford to give the market the impression that'll they entertain a loose policy. We do expect a weak shilling to persist (albeit gradual devaluation) to reflect the weak trade deficit (unchanged trade imbalance).”

YVONNE MHANGO, SUB-SAHARAN AFRICA ECONOMIST, RENAISSANCE CAPITAL:

“It's in accordance with our expectations. We didn't expect them to move. Secondly, the shilling, I think that's been the primary concern of the central bank - keeping it stable. We have noted that they have been trying to keep it in the 82-83 to the dollar region, and given the current account hasn't made a turnaround as of yet, we are not surprised that they chose to keep the rate unchanged.

“If you look at what happened in Uganda for instance, where they started cutting earlier in the year, we've seen the depreciation pressures that the Ugandan shilling has come under. I think that s something the Central Bank of Kenya was trying to avoid.

“We think that it is positive for the shilling that they haven't cut rates.”

“Our concern is if interest rates, the policy rate in particular, remains as high it is now for too long, the economy may be in for a hard landing. So they will need to cut at some point. But we do see that their concerns are the shilling for now, and the fact that food prices later in the year may come under pressure if food prices fail.”

RAZIA KHAN, HEAD OF AFRICA RESEARCH, STANDARD CHARTERED

“The decision of the CBK MPC was largely as expected - noting the positive developments (headline CPI has decelerated, the forex exchange rate is stable, and private sector credit is slowing gradually) but still striking a note of caution. Oil prices and the still-wide current account deficit are seen as risks.

“Despite the overall deceleration in private sector credit, demand for consumer durables actually increased in February (suggesting that last year's tightening still needs more time to set in fully), and perhaps most significantly, non-food and non-fuel inflation remains above the 9 percent level targeted by the CBK.

“With this statement we have clear parameters for what would need to change to make the CBK more comfortable with easing. Also significant is the statement that the CBK will intervene actively in interbank markets to reduce volatility in interbank rates and bring it closer in line with the CBR.

“Given current interbank rates, this probably implies a moderate amount of easing - but specifically with a view to boosting the operational aspects of the CBR - so more de facto than by policy design.

“Still, notwithstanding the concerns outlined about the delay in the long rains - which poses some risk - we still see inflation on a comfortable enough downtrend to allow the CBK to resume an easing cycle eventually. We do not see the first rate move before June however, with much of the easing to come through in the second half of the year. This is still good news - ultimately - for the rates market.”

LEON MYBURGH,SUB-SAHARA AFRICA STRATEGIST, CITI

“This was in line with the majority of analysts though a significant minority, us included, thought they would cut. They highlighted non-food inflation, demand for credit to fund consumer durables, the current account deficit, and delayed rains as key risks to inflation.

“We believed the improved trade and money supply data for January would tilt them to a cut. This decision should be modestly positive for the shilling. Today's decision shows the MPC does not want to take any chances with inflation and is taking a very conservative approach.”

“We continue to believe that the data shows a significant improvement and that the next move will be a rate cut, but it seems the CBK wants to see more conclusive evidence of a slowdown in non-food inflation before doing so.”

MARK BOHLUND, SENIOR ECONOMIST FOR SUB-SAHARA AFRICA, IHS GLOBAL INSIGHT

“The decision should support the Kenyan shilling and allow the central bank to continue to build foreign-exchange reserves. However, the economic cost of extended monetary tightening has yet to be assessed and could be severe, although we expect private consumption and imports to have been bolstered by the recovery of the shilling.

“We are still forecasting the inflation rate to drop into single digits by mid-year and that there is scope for the central bank to start easing its monetary policy within the next few months. However, disappointing CPI and monetary data points for February might have prompted it to opt for caution.”

DUNCAN KINUTHIA, HEAD OF TRADING, COMMERCIAL BANK OF AFRICA

“The market will remain range bound. The decision is in line with what we expected. The only difference is that they've said they will contain exchange rate volatility on the overnight window and that will stabilise the shilling.

“With private credit above target they will continue holding the rate, since that's what fuelled inflation last year.”

ALY KHAN SATCHU, INDEPENDENT ANALYST

“The MPC is clearly playing a cautious and conservative hand especially after the sticker shock increases from last year. I think they have scanned the horizon, seen the rain clouds and said let's give it another month. The next move is lower, that's a given.” - Reuters

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