Central Bank to leave interest rates on hold until next year

CENTRAL BANK OF KENYA

Nairobi; Kenya: The Central Bank of Kenya (CBK) is likely to put off raising interest rates until the second quarter of next year as tumbling oil prices keep a lid on inflation, a Reuters poll found.

All but one of 14 economists surveyed this week said the central bank will keep its benchmark rate steady at 8.5 per cent when the bank meets on Tuesday. The exception, Rand Merchant Bank, forecast a 50 basis-point rise to 9 percent.

The Central Bank of Kenya has left its policy rate unchanged for well over a year. Most economists say rates will rise by the middle of next year, around the same time the US Federal Reserve is expected to raise rates policy. Other central banks from emerging markets - such as South Africa and Brazil - have already begun raising rates in anticipation of tighter US monetary policy, to support their currencies against the dollar.

On Wednesday, the Fed ended its monthly stimulus program in a show of confidence in the US economy’s prospects. Its statement suggested rate hikes may occur sooner than currently forecast, depending on economic data. That may soon put pressure on Kenya’s central bank.

“Steady weakening of the Kenyan shilling is a concern, which adds pressure on the (central bank) in addition to the strengthening US dollar,” said Angus Downie, a strategist at Ecobank.

Lower inflation

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The shilling has lost weakened by more than 3 per cent so far this year. Downie said further declines by the currency and an acceleration in inflation would probably result in a modest rate increase by the central bank by June next year.

Until then, falling oil prices will help to keep inflation within the central bank’s target range of 2.5 to 7.5 per cent, according to the consensus from recent Reuters polls.
Consumer price inflation in East Africa’s biggest economy reached 8.36 per cent in August, its highest since June 2012, then slowed to 6.6 percent in September. Much of the country’s inflation is imported through commodities such as oil and gas. The price of oil is now less than $90 a barrel.

Analysts have lowered their forecasts for oil prices by the most since the start of the financial crisis, according to a separate Reuters poll published on Thursday.

The average forecast for next year is now $93.70 a barrel of Brent crude. “The sharp collapse in the price of oil is going to send the inflation rate lower in the coming months,” said Aly-Khan Satchu, the chief executive officer at Rich Management.

Re-basing the calculation of the Kenyan economy has increased it by 25 percent. The new calculation shows the economy grew 5.8 percent in the second quarter, up from 4.4 percent in the first, confirming the faster trend.

—Reuters