The Central Bank of Kenya (CBK) said its
Monetary Policy Committee (MPC) is unlikely to increase the base
lending rate at a meeting Monday morning, offering relief to millions of
borrowers.
CBK Governor Patrick Njoroge said the rise
of inflation in the past three months was a supply side problem that is
mainly driven by shortage of food, making a review of the benchmark
unlikely.
The benchmark rate has remained unchanged at
10 per cent since last September, effectively pricing lending rates at a
maximum of 14 per cent in line with the capping of interest rates at
four percentage points above the Central Bank Rate (CBR).
“We
don’t see any strong reason to alter the base rate,” Dr Njoroge said on
the sidelines of the just-concluded Africa CEOs forum in Geneva.
“Remember
the inflation is mainly food-driven due to the drought, not because of
higher appetite for imports or increased money supply. We anticipate a
drop in two months as the rains resume,” Dr Njoroge said, adding that
the shilling is relatively steady against the dollar.
Dr
Njoroge said the central bank was more concerned about the slowdown in
private sector credit growth than inflation pressure, which it considers
temporary.
Lending to businesses and individuals grew a
paltry 4.3 per cent in the year to December, down from a 20.6 per cent a
year earlier, making it the slowest growth in more than 10 years. The
credit squeeze means less money supply in the economy and sluggish
demand for goods and services.
The Kenya Bankers
Association blames the squeeze on interest rate controls that took
effect last September and has seen banks shun private borrowers
perceived to be risky.
The CBK considers a credit growth rate of between 12 and 15 per cent ideal for purposes of stimulating economic growth.
The
MPC meets every two months to review the rate. Inflation hit a
four-year high of 9.04 per cent last month in the wake of a rally in
food and fuel prices.
The CBK now expects inflation to
fall within the government’s preferred range of between 2.5 per cent
and 7.5 per cent as food supply picks up with the onset of rains next
month.
Dr Njoroge said the CBK foresees a relatively
stable forex market in the medium term, citing a narrower current
account deficit and a sizeable foreign currency reserve to cushion the
economy from any unforeseen major shocks.
The shilling
opened the year at Sh102.50 to the US dollar but rapidly sank to trade
at a low of Sh104 end of January before bouncing back to Sh102.90 last
week.
Core inflation or underlying inflation, which
leaves out volatile goods such as food and fuel, declined in February to
3.7 per cent from 4.5 per cent a month earlier, offering the CBK yet
another reason to hold the base rate.
Interest rate
controls were introduced following a public outcry over high cost of
loans that lined the pockets of banks with double-digit profits growth
even as other sectors of the economy tanked
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