Kenyan rate cut possible amid slowing growth and easing inflation, but strong dollar counterweighs

By bne IntelliNews January 6, 2015

The Monetary Policy Committee (MPC) of Kenya’s central bank might decide on a rate cut when it meets next week, although a maintenance of the current 8.5% level is more plausible, as decision makers have to find a balance between slowing economic growth and easing inflation, on the one side, and pressures on the shilling stemming from the global strength of the US dollar, on the other.

Only two months ago, some analysts predicted a rate hike at the beginning of 2015, as emerging market central banks were largely anticipated to tighten monetary policy in order to protect their currencies amid expectations for a rate hike in the US. While the strong US dollar continues to pressure emerging market currencies, the global oil price slump has led to a considerable alleviation of inflationary pressures for oil importers, like Kenya, which saw its end-year inflation rate dropping to an 18-month low of 6.02%. Moreover, the inflation outlook for 2015 has improved significantly as oil prices remain muted, although weather conditions will dictate trends in food prices, which are the main inflation driver, comprising more than one-third of the CPI basket.

Meanwhile, recent data showed that Kenya’s GDP growth slowed to 5.2% y/y in Q3 2014 from 5.7% y/y in the preceding quarter, driven mainly by dwindling growth in the manufacturing, construction and real estate sectors. This should put additional pressure on the central bank, which has been long struggling to influence a reduction in commercial banks’ lending rates and a subsequent boost in credit to the private sector (including key sectors like manufacturing, construction and real estate) that should prop up economic growth. East Africa’s largest economy is expected to enjoy a strengthening expansion (to 6.9% this year from an estimated 5.3% in 2014, according to the IMF), underpinned chiefly by government investments in railway infrastructure and energy generating capacity.

A small rate expectations survey carried out by the Business Daily suggested that economists expect the Central Bank of Kenya (CBK) to find the right balance between the improved inflation outlook, the desire to support private sector lending, the need to shore up the shilling, and the risks for inflation, stemming from rising demand amid strengthening economic growth. According to Vimal Parmar, head of research at Nairobi-based Burbidge Capital, a reduction by 25 to 50 basis points is possible, while Razia Khan, head of research on Africa at the Standard Chartered Bank, and Maureen Kirigua, a research analyst at Sterling Capital in Nairobi, believe the central bank rate (CBR) would be retained.

“Lowering the CBR might actually push up inflation again and you don’t want that. You try to avoid demand-driven inflation,” Kirigua was quoted as saying.

The CBR has stayed at 8.5% since May 2013 after having reached as high as 18% in the first half of 2012 amid soaring inflation.

CBK will hold its next bi-monthly rate-setting meeting on January 14.

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