Inflation fears to keep bank rates on hold

 

Traders at a food market. The rate of inflation stood at 4.92 per cent in June. FILE 

By John Gachiri

In Summary

• Bloomberg News on Monday quoted Treasury secretary Henry Rotich saying that the rising inflation rate was reducing CBK’s room to cut rates below 8.5 per cent.
• The rate of inflation stood at 4.92 per cent in June, slightly below the five per cent target that the bank has set.

The government’s inclination to hold interest rates at the current level could still benefit consumers if it results in stabilisation of the inflation rate, analysts have said.

Bloomberg News on Monday quoted Treasury secretary Henry Rotich saying that the rising inflation rate was reducing CBK’s room to cut rates below 8.5 per cent.

This gave a strong indication that the Central Bank of Kenya (CBK) would hold interest rates at the current level in forthcoming reviews.

Razia Khan, the head of Africa research at Standard Chartered Bank said the rate of inflation could hit six per cent mark in the just ended month of July (year-on-year basis), which could make it untenable to lower the CBK rate.

“The achievement of more stable inflation should still mean that bank loan rates have room to come down further over time.  In addition, as competition in the banking sector gets under way, there will be more pressure on margins,” said Ms Khan.

Policy makers and economists said they expect that the CBK is unlikely to cut the base rate below the 8.5 per cent level, saying the regulator’s role of taming the rate of inflation will limit its ability to cut the base rate further.

The rate of inflation stood at 4.92 per cent in June, slightly below the five per cent target that the bank has set.

“As the CBR has already been reduced to 8.5 per cent, this means that there is little scope for further CBR rate cuts, most likely in this cycle,” said Ms Khan in an e-mail.

Analysts say that the rate on inflation is expected to cross the five per cent mark due to pressure from the weakening shilling, increase in taxes and oil prices rising globally.

“This will be on the back of higher fuel prices as well as a weak shilling. Going forward, the increase in taxes including the 1.5 per cent railway levy on fuel and other imports should support the high inflationary expectations,” said a NIC Securities fixed income weekly report.

Plugging the Sh356 billion will require some local borrowing, coupled with low liquidity means that rates have to be high enough to attract buyers of Treasury Bills and bonds.

“The increasing pressure to fund the Sh1.6 trillion budget coupled with the reduced liquidity should support higher yield on the treasuries,” said the NIC Securities report.