Hopes of lower lending rates as CBK's advisory team meets Monday

Sunday March 20 2016

Central Bank of Kenya Governor Patrick Njoroge during a press conference at the CBK on the Monetary Policy Committee decisions as at January 21, 2016. PHOTO | DIANA NGILA | NATION MEDIA GROUP

Central Bank of Kenya Governor Patrick Njoroge during a press conference at the CBK on the Monetary Policy Committee decisions as at January 21, 2016. PHOTO | DIANA NGILA | NATION MEDIA GROUP 

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The Central Bank’s advisory committee meets Monday to review Kenya’s growth momentum, with experts betting on a lending rate cut.

Analysts say the Monetary Policy Committee could lower the Central Bank Rate (CBR) by 50 basis point to 11 per cent as an indication to banks to lower the cost of lending, making credit cheaper.

The committee has held the benchmark lending rate at 11.5 per cent for the past five meetings since the last review late last year.

“Given the favourable environment and positive factors outlined above, there is a possibility the MPC may consider lowering the CBR by 50 bps to 11.0 per cent,” said Cytonn Investments.

Cytonn said this could serve as a signal that the interest rates are attractive to the economy at the current levels, and would be in line with the CBK governor’s earlier statement that MPC is working towards lowering rates, anchored by a stable currency and inflation rates.

The committee could, however, leave the rate at the current level to avoid unsettling the environment characterised by a stable currency and growing foreign reserves.

Sterling Capital trader Eric Munywoki also said there was a possibility of lowering the rate, but added that he was of the opinion it should be maintained at the current level.

CfC Stanbic Bank regional economist Jibran Qureishi said he expected the rate to be retained this time and to be lowered in subsequent meetings before September.

“We do not expect it this time, but they may pull a surprise. What we expect is that the economy will be given a tonic in terms of a rate cut before September,” Mr Queirishi said.

According to CBK data, foreign reserves rose to $7.3 billion this week, which is equivalent to 4.7 months of import cover.


The current account deficit, currently at 6.9, has significantly narrowed from last year on lower oil prices while inflation has remained within target, declining in February to 6.8 per cent, from 7.8 per cent in January, on account of lower oil prices.

Since January, Kenya has experienced some positive news, starting with expectations of a high economic growth rate forecast, with the IMF projecting a 6 per cent GDP growth rate.

The money market has remained relatively liquid, supported by CBK’s Open Market Operations through reverse repos of Sh69 billion since the last MPC meeting.

But inflation could come under pressure in September when the government imposes excise duty on petroleum products.

Mr Qureishi, however, said the excise duty would be a one-off, adding that he was not too concerned about it. He cited a possible delay of the long rains as a bigger threat to inflation.

“If the long rains do not pick up in March, April and May, that may have an impact on food inflation,” he said.

Oil prices may also pose a threat to inflation, given that the Western Texas Intermediate Index (WTI) has been trading at $40.9 a barrel in the futures market while Brent crude was selling at $42.2 on Friday. CFC Stanbic’s view is that oil price may rise to $50 a barrel by the end of the year.

The shilling, which had strengthened to 101.4 to the dollar by Friday, may also come under pressure when the US Federal Reserve increases its lending rate later this year, spiking capital flight from emerging markets. On Wednesday, the Fed kept the rate unchanged although it might be reversed upwards later in the year.

Cytonn says the currency may also come under pressure from the dividend payment season by corporates, which may result in an increase in dollar demand by foreign investors.

The government has also failed to indicate where it intends to borrow Sh294.1 billion externally after a Sh60 billion ($588 million) external loan from syndicated banks in October.

The Treasury is also ahead of its local borrowing target, which could indicate that the money will come from internal sources, a move that may put interest rates under pressure.