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Central Bank likely to raise key policy rate to 9.5 per cent

Zachary Ochuodho @zachuodho

The Central Bank Rate (CBR) is likely to be reviewed upwards by 50 basis points to contain inflationary pressures likely to be caused by increased inflationary pressure and weakening of the Kenya shilling, the latest Business Monitor International (BMI) report indicates.

According to the report, the Central Bank’s Kenya Monetary Policy Committee could raise the CBR to 9.50 per cent by end of the year.

This implies that banks will lend at 13.5 per cent as lending rates are pegged at four percentage points above the prevailing CBR rate.

For a number of months, the committee has retained the CBR at nine per cent, meaning banks are lending at 13 per cent. When the team met in November last year it retained the Central Bank Rate at nine per cent on account of inflation remaining within the bank’s target range of between 2.5 and 7.5 per cent.

The apex bank, which was under pressure to increase the rate following bullish oil prices and rising inflation pushed by consumption tax on oil, held off an upward review in the wake of a surprise dip in oil prices.

However, going forward, the BMI study indicates inflation is set to pick up in the coming months to average 4.7 per cent. “Normalising harvests and a likely weakening of the exchange rate will see inflation rise.

High food supply owing to robust agricultural production after a good harvest has pushed down food prices in 2018,” reads the BMI report.

It is expected that food prices will stabilise later in the year when food supply normalises after a bumper harvest late last year.

Emerging market

On the currency front, the shilling is seen depreciating faster this year owing to pressure from emerging market currencies thus piling pressure on the cost of imports and their pricing.

“Given these rising price pressures, we expect the monetary policy committee to raise the policy rate by 50 basis points in 2019 to 9.5 per cent by year-end. We do not forecast inflation to rise above the target range of between 2.5 and 7.5 per cent,” BMI researchers said.

Depreciation of the shilling against the major currencies can spike inflation because Kenya is a net importer of goods. “Inflation can also be caused by factors that influence the demand for goods and services, like the amount of money ordinary people have available to spend,” Johnson Nderi, manager Corporate Finance and Advisory at ABC Capital said.

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