CBK to cut interest rates to boost economic growth

By Kevin Mwanza

The Central Bank is expected to cut its benchmark lending rate by one percentage point to 10 per cent this week to stimulate the economy, a Reuters poll showed.

The Central Bank rate-setting committee, which embarked on a monetary easing cycle last July, is scheduled to meet on tomorrow. Inflation is on-target and the currency trading at a rate that suggests they have some wiggle room.

Ten of 11 analysts polled by Reuters predicted a cut of 100-200 basis points, with the median forecast coming in at a cut of 100 basis points. One respondent expected policy makers to hold rates at 11 per cent.

“The policy thrust will be towards easing the monetary policy stance to boost economic activity,” said Phumelele Mbiyo, regional head of research at CFC Stanbic bank.

He said the economy had not yet recovered from high lending rates in late 2011 and the first half last year. Inflation was subdued and it was likely to remain so for some time, he added.

Year-on-year inflation fell for the 13th straight month in December to 3.2 per cent, far from commercial banks’ lending rates, which stand at about 20 per cent. “Real interest rates are too high for this point in the economic cycle,” Mbiyo said.

The economy expanded by 4.7 per cent in the third quarter of last year, faster than four per cent in the same period in the previous year, but analysts said there was need for further stimulation.

“The economy is not firing with all cylinders although we saw a mild pick up in the third quarter but on a sequential quarter on quarter basis it remains subdued,” said Aly Khan Satchu, an independent trader and analyst.

 “The central bank will, I am sure, err on the side of watering the green shoots.”

Even though the shilling fell to a seven months low against the dollar in the first trading session of this year, market participants said the currency has been stable, offering policy makers crucial breathing space.

The Monetary Policy Committee  has lent to pro-economic growth policy in the past. In 2011, the committee was criticised for failing to stem a slide in the shilling and a jump in the rate of inflation, by keeping interest rates artificially low to boost growth.

But its ability to guide economic growth to a faster rate through rapid reduction of lending rates has been curbed by a persistently high current account deficit that stands at above 10 per cent of the gross domestic product.

Investors could also adopt a wait-and-see attitude this quarter due to the election. Historically, the economy has suffered from election-related stress.

— Reuters

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