CBK set for further interest rate hike

The Central Bank of Kenya (CBK) is widely expected to lift its benchmark lending rate again when it holds its Monetary Policy Committee (MPC) meeting on Wednesday.

The expectations on the reserve bank’s monetary stance are largely anchored on prevailing high inflation which in June breached the targeted upper limit of 7.5 per cent to stand at 7.9 per cent in June.

In a pre-emptive move at the end of May, the Central Bank of Kenya (CBK) lifting its benchmark lending rate known as the Central Bank Rate (CBR) for the first time in seven years to 7.5 per cent from a flat seven per cent to curb rising inflation.

A further 50 basis points rate hike, the same as in May would move the base lending rate to above the prevailing inflation rate pointing to the efforts by the reserve bank to tame higher living costs.

In a report earlier this week, the International Monetary Fund (IMF) backed interest rate hikes by the CBK as it expects Kenya’s inflation rate to stick above the upper limit in the near term.

“The CBK’s recent monetary policy tightening is welcome. The Central Bank should stand ready to continue to adjust its stance to limit second-round effects from higher food and fuel prices to keep inflation expectations well-anchored amid a temporary increase of inflation above the target band,” the IMF stated.

The multi-lateral lender expects the rate of inflation to roam above the 7.5 per cent ceiling in coming months before settling at a mean 7.3 per cent for the year.

Nevertheless, recent State interventions including the retention of the fuel subsidy in July and the activation of a new maize flour subsidy program are expected to anchor down inflation expectations in the interim.

However, the inflation trajectory may not be the only factor on the table at Wednesday’s MPCs as the runaway depreciation of the Kenyan Shilling continues.

At the end of June, commercial banks called for higher interest rates to cushion the local currency unit by incentivising investments in Kenya Shilling denominated assets through passing higher yields to holders.

“The cure is to make holding Kenya Shilling assets more valuable than holding the dollar equivalent. We have a fair amount if imported inflation, our inflation is a bit linked to the dollar, so in addressing inflation by raising interest rates, we will also be indirectly addressing the dollar problem,” Kenya Bankers Association (KBA) Chairman and NCBA Managing Director John Gachora said on June 23.

Across the globe, Central Banks in advanced economies have been raising interest rates with the latest hike coming from the European Central Bank (ECB) on Thursday.

The effect of the higher interest rates has been capital flight from emerging and frontier markets such as Kenya as foreign investors see better returns back home.

CBK’s primary role remains the maintaining of price stability in the economy to support sustainable economic growth.

The role is undertaken through monetary policy interventions which includes adjustments to the CBR and open market operations (OMO) which covers bank’s purchase/sale of government securities from/to commercial banks.