NAIROBI (Reuters) – Kenya’s central bank is expected to cut its benchmark lending rate by one percentage point to 10 percent this week to stimulate the economy, a Reuters poll showed on Tuesday.
The central bank‘s rate-setting committee, which embarked on a monetary easing cycle last July, is scheduled to meet on January 10. Inflation is on-target inflation and the currency trading at a rate that suggests they have some wiggle room.
Ten out of 11 analysts polled by Reuters predicted a cut of 100-200 basis points, with the median forecast coming in at a cut of 100 basis points. One respondent expected policymakers to hold rates at 11 percent.
“The policy thrust will be towards easing the monetary policy stance to boost economic activity,” said Phumelele Mbiyo, regional head of research at CFC Stanbic bank.
He said the economy had not yet recovered from high lending rates in late 2011 and the first half of 2012. Inflation was subdued and it was likely to remain so for some time, he added.
Year-on-year inflation fell for the 13th straight month in December to 3.2 percent, far from commercial banks’ lending rates, which stand at about 20 percent.
“Real interest rates are too high for this point in the economic cycle,” Mbiyo said.
The economy expanded by 4.7 percent in the third quarter of 2012, faster than 4 percent in the same period in the previous year, but analysts said there was need for further stimulation.
“The economy is not firing with all cylinders although we saw a mild pick up in the third quarter but on a sequential quarter on quarter basis it remains subdued,” said Aly Khan Satchu, an independent trader and analyst.
“The central bank will, I am sure, err on the side of watering the green shoots.”
Even though the shilling fell to a seven months low against the dollar in the first trading session of this year, market participants said the currency has been stable, offering policymakers crucial breathing space.
The Monetary Policy Committee in the east African nation, which is in the throes of a divisive campaign season ahead of a March 4 presidential election, has lent to pro-economic growth policy in the past.
In 2011, the committee was criticised for failing to stem a slide in the shilling and a jump in the rate of inflation, by keeping interest rates artificially low to boost growth.
But its ability to guide economic growth to a faster rate through rapid reduction of lending rates has been curbed by a persistently high current account deficit that stands at above 10 percent of the gross domestic product.
Investors could also adopt a wait-and-see attitude this quarter due to the election. Historically, the economy has suffered from election-related stress.
It suffered from severe shocks after the results of the last election in 2007 were disputed, leading to tribal violence that left 1,250 people dead and displace many more.
“Investor uncertainty is likely to increase ahead of the March general election prompting huge capital outflows, which would continue to weaken the currency and increase inflationary pressures,” said Gaimin Nonyane, a senior macroeconomic specialist at Ecobank, which predicted a hold decision.
“This is in addition to a potential rise in election-related expenditure- this will inject liquidity into the economy and thus increase inflationary pressures.”
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