Country Report Kenya October 2012

Update Country Report Kenya 06 Jul 2012

Central bank cuts interest rates as inflation subsides

Event

The monetary policy committee of the Central Bank of Kenya (CBK) cut the benchmark central bank rate (CBR) by 150 basis points to 16.5% on July 5th, signalling a first relaxation in the country's monetary policy in 18 months.

Analysis

The CBK embraced stringent monetary tightening in the fourth quarter of 2011, lifting the CBR from 7% in September to 18% in December in response to surging inflation and a slide in the shilling. Despite the negative impact on commercial banks' lending rates (leading to a slowdown in credit demand)-and on the government's borrowing costs in the domestic market-the action proved successful. Inflation fell from a peak of 19.7% last November to 10% in June, a 15-month low, while core inflation (excluding food and fuel) dipped to 9.3% in June, therefore allowing for a rate reduction. The 150-basis-point cut was larger than expected, but reflects official concern about sluggish domestic growth and global fragility arising from the euro-zone debt crisis.

The EIU expects additional rate cuts in 2012, possibly taking the CBR to 12% by year-end, although the precise timing and magnitude of subsequent monetary relaxation will depend on inflation and exchange-rate trends in the interim. Notably, the CBK also announced a return to a two-monthly rate-setting cycle, with the next one taking place in September, signalling confidence that the inflation crisis has passed. The main downside risk to monetary loosening is that of fresh shilling weakness, especially given the uncertain global appetite for emerging-market assets at present. However, real interest rates remain firmly in positive territory, while foreign-exchange reserves have risen following the receipt of a US$600m foreign bank loan, which will help to shield the shilling.

Impact on the forecast

Monetary loosening and the prospect of a reduction in commercial banks' lending rates will underpin a gradual revival in credit demand. This supports our forecast that interest rates will subside during the second half of 2012 as inflation eases.

© 2012 The Economist lntelligence Unit Ltd. All rights reserved
Whilst every effort has been taken to verify the accuracy of this information, The Economist lntelligence Unit Ltd. cannot accept any responsibility or liability for reliance by any person on this information
IMPRINT