CBK team expected to hold key rate as GDP growth slows

Money Markets

Rich Management CEO Aly-Khan Satchu during an investor briefing. Mr Khan said the effects of the rate capping law were evident in the slowdown in private sector lending. PHOTO | DIANA NGILA 

By BRIAN NGUGI, bnjoroge@ke.nationmedia.com

In Summary

• The August General Election and Donald Trump’s swearing-in among issues of concern.

Analysts expect the Central Bank of Kenya (CBK) to leave its benchmark lending rate unchanged when it meets at the end of this month.

The CBK monetary policy committee (MPC) held the base lending rate at 10 per cent in its November meeting despite a slightly weaker shilling and higher inflation.

The next MPC meeting will be held on January 30 at a time pressure on the shilling has been mounting and Wednesday hit a fifteen-month low with the financial services regulator intervening.

“I think the economy is softer than the headline gross domestic product (GDP) figures and that the CBK will keep rates unchanged,” Rich Management CEO Aly Khan Satchu said.

John Kirimi, Sterling Capital investment director also projected the CBK would leave the rates unchanged.

“There are a lot of ‘unknowns’ in the pipeline including a possible strengthening of the dollar as the US President-elect Donald Trump is sworn in on January 20, which could impact on the shilling but also our own General Election. In my view the CBK would do well to hold the rate and adopt a wait-and-see attitude to see the fuller implications of these unknowns,” said Mr Kirimi.

In the previous meeting, there had been concern the CBK might be pushed to tighten monetary policy in response to a weakening shilling — that had hit a nine-month low of 102 units to the dollar in November — and rising inflation, which stood at an eight-month high of 6.5 per cent in October and 6.35 December.

The MPC at the time said it expects the inflation rate to remain within statutory bounds and added that it was too early to determine the impact of the interest rate cap on bank lending and deposits on monetary policy and overall economy.

READ: Business optimism dips as banks cut lending, survey shows

Mr Khan, however, said the effects of the rate capping had become clearer, noting the slowdown in private sector lending.

“The apex bank has had a full in-tray through 2016. The interest rate law [which the CBK to their credit argued against] was a further curve-ball. I think it is increasingly clear that there has been a stampede into Government of Kenya considered ‘risk free’ on the balance sheet paper. This has been singularly helpful for the government, but it has come at a cost, particularly to the SME sector which has been crowded out,” Mr Khan said.

With its November rate hold the maximum rate on bank loans remained 14 per cent, being four percentage points above Central Bank Rate (CBR) as per the law.

The move spared bank customers the pain of higher cost of loans.

The regulator then said it was more concerned with global uncertainties coming from the US election and the rate increase of the US Fed rate, as well as the lingering effects of Brexit, Britain’s shock decision to leave the European Union.

The US Fed increased its key interest rate by 0.25 per cent late last year. The committee concluded that inflationary pressures were mild and inflation will remain within the government target range in the short term. Given the prevailing domestic and global economic uncertainties and the need for more conclusive information on these developments, the MPC decided to retain the CBR at 10 per cent,” said the CBK in a statement on the MPC meeting in November.