CBK's monetary policy team meets over interest rate

Central Bank of Kenya’s Monetary Policy Committee is expected to meet Thursday to decide on the direction of its benchmark rate.

Majority of analysts says that CBK has a ‘bit more room’ for manoeuvre compared to the last meeting last month in which the bank retained its benchmark rate at 18 per cent for the sixth month running.

"Inflation has been falling since January and all indications show that interest rates should fall,” said Professor Michael Chege, a policy analyst at the Ministry of Planning.

Analysts however note that the cut, if it happens, will only be slight as CBK remain cautious on the effect this will have on the exchange rate and inflation .

“Any decision they make will bear in mind the fact that they can’t keep the rates very high for too long, while at the same time, trying to sustain the gains made on foreign exchange and on inflation,” said Nairobi economic analyst Robert Shaw, noting that a cautious cut would allow for market assessment before trimming the rate further down.

Inflation has fallen for the seventh consecutive month to 10.05 per cent last month from 19.72 per cent in November last year, while the shilling has stabilised at levels of Sh84 to the dollar.

However, the economy slowed down to 3.5 per cent in the first quarter this year from  slowest in four years dropping to 3.5 per 5.1 per cent recorded in the same period of last year.

“CBK will have to balance the decision on the level of credit growth in the economy and the exchange rate volatility. Right now, the fundamentals are okay as inflation has come down significantly and the shilling has stabilised against the dollar,” Standard Investment Bank research analyst Eric Musau told Nation on phone.

Risk analyst Kariithi Murimi noted that the bank would hold the rate for another month and lower it only after the foreign exchange dynamics and the export base have reacted favourably.

“As long as exports are not picking up, this might affect the shilling, which calls for a rate hold. But the governor might start smelling less of import pressure on maize as the crop begins to mature starting next month,” Mr Murimi said.

In its last meeting on June 6, the CBK said that the Kenya shilling was vulnerable to external shocks due to the current account deficit, estimated at 11.4 per cent of GDP in April 2012, and the instability in the Euro Zone.  

“We have a responsibility to make sure that the economy is growing to create more job opportunities. The monetary policy should always be guided by the rate of economic growth the country is looking to achieve,” Central Bank governor Njuguna Ndung’u said Wednesday.