CBK seen holding rates on easing inflation, forex pain

The Central Bank of Kenya (CBK) is widely expected to hold interest rates at its monetary policy committee meeting on Wednesday on reduced inflationary and foreign exchange rate pressures.

On February 6, the CBK raised the benchmark Central Bank Rate (CBR) to 13 percent from 12.5 percent, a successive increase aimed at setting inflation on a firm downward path and easing pressure on the exchange rate.

Since that meeting, the apex bank has marked twin wins from the deceleration in inflation, which is now trending towards the desired midpoint of five percent, and a rally of the Kenyan shilling against major world currencies.

Headline inflation for instance eased to 5.7 percent in March, the lowest consumer prices print in two years, as the price of key food commodities including wheat flour, fortified and sifted maize flour and cabbages declined from a year before.

The deceleration offset a faster pick up in the prices of commodities under the transport and energy indexes in the same period.

Meanwhile, non-food, non-fuel or core inflation has remained flat at 3.6 percent since January, mirroring a pause in the growth of secondary inflationary effects in the economy.

The overall inflation rate now sits closer to the mid-point of five percent aligning with CBK’s mandate of maintaining growth in consumer prices beyond 2.5 percent but at no more than 7.5 percent.

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At the same time, the foreign exchange rate has staged a rally of nearly 18 percent since the last monetary policy decision, arresting inflationary concerns emanating from costlier imports.

On Thursday last week, the CBK quoted the Kenya shilling at Sh131.56 against the US dollar representing an appreciation of 17.8 percent since February 7 when the local unit was quoted at Sh160.18.

Besides the CBR hike in February, the local currency has received impetus from the early buyback of part of Kenya’s Sh263.1 billion ($2 billion) debut Eurobond notes with the move drowning out default concerns.

The combination of a falling inflation rate and easing foreign exchange rate pressures have anchored the wide expectations for a rate pause by the CBK. “First of all, I am expecting a retention of the monetary policy rate as inflation moves closer to the midpoint, faster than we would have expected,” noted Stellar Swakei, a senior research associate at Standard Investment Bank.

Analysts at Sterling Capital meanwhile have observed improved investor confidence in Kenya following the partial Eurobond refinance and expect a rate pause as the inflation rate resets downwards.

“With inflation easing, we believe the monetary policy committee is likely to hold the rate unchanged in the April meeting,” the analysts noted in an earlier note.

“The MPC noted that overall inflation has remained sticky in the upper bound of the target range. In addition, the MPC noted continued, albeit reduced, pressures on the exchange rate and therefore concluded that further action was needed to stabilize prices,” the CBK noted.

CBK nevertheless faces pressure to lower interest rates on government securities which had hit highs of 18.4 percent.

The apex bank is currently offering guidance on interest rates on long-term bonds while rejecting aggressive investor bids for higher returns as a measure to contain yields on government paper.

Lower interest rates on government securities are largely pegged on the cutting of the benchmark lending rate while a hold in policy is still seen supporting existing yields on Treasuries.

Read: CBK hits borrowers with highest loan rate in 12 years

“As long as the CBR remains elevated, interest rates on government securities will remain high,” added Ms. Swakei.

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