Brace for higher interest rates, says AIG

Interest rates could edge higher in coming months as the government and the private sector compete for cash in the market, a fund manager has said.

The government, through the Central Bank of Kenya, is planning to borrow at least Sh109 billion to finance this year’s Sh866 billion budget.

And at the same time at least five corporate firms have announced plans to enter the debt market to borrow more than Sh20 billion over the same period.

“Though the Central Bank prefers low and stable interest rates, there’s likelihood that this could be challenged by the expected increased competition for funds,” AIG East Africa senior investment manager, Edward Gitahi said on Wednesday during the company’s third quarter briefing.

CBK has over the past two years been able to maintain low interest rates by rejecting high priced bids for government credit papers, which are normally used as a benchmark for market rates.

Among the corporates seeking to raise funds from the debt market include Safaricom, KenGen, Stanbic and Shelter Afrique.

Expected high inflation, as food prices edge up due to poor weather and high fuel prices, is also expected to apply pressure on lending rates.

High fuel prices and low rainfall are likely to cause an increase in power prices as the country shifts to the more expensive thermal generation.

KenGen, the country’s main power producer, has however given a commitment that it will not increase its tariffs.

Overall inflation, says AIG, is projected to average 20 per cent.

“Earlier forecasts were that inflation could recede to a single digit level,” said AIG senior investment manager, Peter Wachira.

On the overall economy the fund manager projects a growth of between 2 to 2.5 per cent in 2009 and a doubling of the rate to 4 per cent in 2010 on account of stimulus spending by government.

AIG’s growth forecast is the most pessimistic, with its counterpart Old Mutual Asset Manager forecasting a 3.2 per cent, the International Monetary Fund (IMF), put the growth rate at 3 per cent rate while government estimates a rate of between 2-3 per cent.

“The economy is still reeling from the effects of high inflation that has suppressed spending,” Mr Wachira added.