Banks eye CBK policy team for interest rate direction

Most analysts interviewed by the Business Daily predicted a retention of the benchmark policy rate at its current level, and a slight jerk upwards by early next year. Photo/FILE 

By GEOFFREY IRUNGU

In Summary

• The Central Bank of Kenya is today expected to signal interest rate direction for the next two months at the Monetary Policy Committee
• Most analysts interviewed by the Business Daily predicted a retention of the benchmark policy rate at its current level, and a slight jerk upwards by early next year

The Central Bank of Kenya is today expected to signal interest rate direction for the next two months at the Monetary Policy Committee (MPC’s) meeting.

The policy organ meets against the backdrop of a stable currency and a falling inflation rate.

Overall inflation stands at an average of 7.18 per cent in the past four months, against a CBK target of a maximum of 7.5 per cent. The MPC will weigh the need to keep the economic growth momentum to hit the 5.5 per cent target for this year, given that the first half of the year saw expansion in the gross domestic product of 4.7 per cent.

Most analysts interviewed by the Business Daily predicted a retention of the benchmark policy rate at its current level, and a slight jerk upwards by early next year.

“I think they will retain the CBR at its current level of 8.5 per cent. The exchange rate has been generally stable. Inflation is not likely to rise any further, and may come down to six per cent before the close of the year,” said Eric Munywoki, a research analyst at Old Mutual Securities.

But Mr Munywoki said the CBR could rise since commercial banks are being charged 14.5 per cent at the discount window, and the two are supposed to be closely aligned for the CBR to be an effective rate.

“This CBR should actually be (at 11 per cent) because the discount window is at 14.5 per cent. The CBR should be closer to the discount window, which is really the rate at which the banks are accessing cash from the central bank,” said Mr Munywoki.

Inflation began to rise when the value added tax (VAT) Act 2013 was enacted in September and prices of many goods rose immediately. The overall inflation for the month increased to 8.29 per cent but decelerated to 7.76 per cent last month. The 7.18 per cent average for the first four months of the financial is only 0.32 percentage points from the upper borderline.

The Treasury has set a target of five per cent with 2.5 percentage points above or below it — meaning that it can range between 2.5 and 7.5 per cent.

Alexander Muiruri, bond trader at African Alliance Investment Bank, sees the CBR rising modestly by January in line with modest increase in prices next year. “We expect the CBR to adjust upward by 50 basis points (to 9.0 per cent] by January 2014. There’s a good case for headline inflation growing marginally until May 2014 due to positive base effects on food inflation,” said Mr Muiruri.

The Standard Chartered Bank head of research for Africa region Razia Khan said the MPC is likely to be tolerant of a slightly higher inflation without raising interest rates until March next year.

“Given concern over the aftermath of Westgate and its impact on business confidence, we believe that the authorities will be more accommodating of a temporary breach of their 2.5-7.5 per cent inflation target…The CBR is likely to remain on hold at 8.5 per cent until next year,” said Ms Khan.

The Treasury has expressed confidence that the second half will make up for the lower first half GDP growth in order to realise the 5.5 per cent target in 2013 and maintain the momentum for next year’s 6.0 per cent target.

Treasury Secretary Henry Rotich said recently that apart from faster growth in the second half, experience had shown that statistics for the first half were normally revised upwards by the year end.

The GDP growth momentum has implications as the budget and jobs creation targets are predicated on 5.5 per cent GDP for this year, rising to seven per cent by 2017 under the second Medium Term Plan (MTP2) which is part of Vision 2030.