Central bank retains key rate, sparing borrowers

Kenya: The Central Bank of Kenya retained its key lending rate at 8.5 per cent for the 12th time yesterday, terming the weakening currency and rising inflation “seasonal”.

The retention of the key rate effectively shields borrowers from costlier credit.

An upward review of the monetary policy rate, however, was anticipated as a possible intervention for the weakening shilling, which has slumped to Sh95.04 to the dollar — levels last reported in 2011.

But CBK’s Monetary Policy Committee in its sitting yesterday linked the weakening of the shilling to the seasonal demand for foreign currency as international investors repatriated dividends and profits.

Most companies have just declared their full-year results and dividends, and foreign shareholders would typically sell shillings earned from their businesses in Kenya for their home currency before remitting the funds.

International investors account for more than half of the shareholding of most companies listed at the Nairobi Securities Exchange, making the amount of dividends taken out of the country during the earnings period is significant.

The MPC also noted that the strengthening of the US currency globally had contributed to the weakening of the shilling.

The committee, which is chaired by Deputy Governor Haron Sirima, linked rising inflation to the increase in food prices occasioned by lower-than expected rainfall since November last year.

“Despite upward pressure from food prices ... overall inflation remained within the Government target range in March and April 2015.”

Dr Sirima — one of the shortlisted candidates for the position of CBK governor — said there were no demand-driven threats to inflation, adding that the shocks on the exchange rate had triggered inflationary expectations.

“The MPC will, therefore, pursue the current tightening bias stance in the money market through CBK monetary policy operations to anchor inflationary expectations,” he said.

CBK uses the key lending rate to tackle high inflation by raising the cost of credit to discourage borrowing and consumption. Typically, commercial banks raise interest rates on loans when the CBK rate is raised.