CBK likely to hold key rate despite inflation spike, say analysts

Central Bank of Kenya (CBK) is likely to retain its key lending rate at nine per cent despite inflationary pressure due to drought, analysts have predicted.

Capital Economics, a London-based economic research consultancy, said in its update that although drought will probably push inflation above the CBK’s target range of between 2.5 per cent and 7.5 per cent in the fourth quarter, the apex bank is likely to ignore the spike as it did in 2017.

“We expect that policymakers will keep their key rate on hold at nine per cent over the remainder of 2019. Provided that the drought ends, inflation should fall back within the target rate early next year,” said the firm.

The next meeting of the regulator’s decision-making organ, the Monetary Policy Committee (MPC), will take place on September 23.

Central Bank Rate, the lowest rate of interest the apex bank charges on loans to banks, has been held at nine per cent for 12 months to July this year.

However, prices of goods and services, otherwise known as inflation, increased by a slower pace of five per cent in August compared with 6.27 per cent in July. CBK expects inflation to keep going down.

The slowdown was due to improved weather conditions which saw the cost of food go down during this month.

“The prices of significant food items, including sukuma wiki (kales), potatoes, cabbages, carrots, tomatoes and maize grain loose decreased by 8.01, 7.81, 6.78, 6.01, 4.89 and 2.80 per cent, respectively,” said the Kenya National Bureau of Statistics.

“In August 2019, Food and Non-Alcoholic Drinks’ Index decreased by 1.89 per cent following a decline of 1.04 per cent that was recorded in July 2019. This decline was mainly attributed to favourable weather conditions...”