Kenya's Central Bank May Keep Main Rate Steady for Second Straight Meeting

Kenya’s central bank will probably keep its benchmark interest rate unchanged tomorrow for the second straight meeting, allowing more time for commercial banks to drop their lending rates.

The Monetary Policy Committee, which meets every two months, will leave the key lending rate at a record low of 6.75 percent, according to three of the four economists surveyed by Bloomberg News. David Cowan, Citigroup’s Africa economist, forecast a reduction of as much as 1 percentage point. The Nairobi-based Central Bank of Kenya will probably announce the decision tomorrow afternoon.

“The MPC said at its last meeting in May that it would like more time to see how previous accommodation feeds through the system,” Stuart Culverhouse, chief economist at London- based investment bank Exotix Ltd., said in an e-mailed response to questions. “More time is needed to make that assessment.”

Commercial lenders in Kenya, East Africa’s biggest economy, haven’t lowered their borrowing rates in tandem with five cuts to the benchmark interest rate in Kenya since March 2009. The average lending rate to businesses and households was 14.39 percent in June, down from 15.1 percent a year earlier, according to the central bank’s website. Kenyan banks say loans are costly because the default rate for repayment is high.

A decision to leave the key lending rate on hold would be in line with Kenya’s goal of low inflation, Razia Khan, Africa analyst at London-based Standard Chartered Plc, said by e-mail. Good rainfall from this year has boosted crop production, helping to slow inflation in Kenya for three of the past four months, with the rate reaching 3.2 percent in June.

Shilling Volatility

“Inflation is currently well-behaved, but recent shilling volatility poses some risk to the outlook,” said Khan.

The shilling slumped to the weakest level in six years versus the dollar in June on speculation that the central bank was boosting purchases of foreign currency to bolster its reserves.

“The current lows in 91-day T-bills and recent oversubscription of longer-dated bonds are evidence of still- ample liquidity levels,” Khan said. “It is doubtful that the Central Bank of Kenya will want to add to this just yet.”

The average yield on Kenya’s 91-day Treasury bills declined to 1.728 percent on July 15, compared with 8.619 percent in December 2008, the highest since March 2006 when Bloomberg began regular record-keeping of the data.

The bank may cut rates between half a percentage point to one percentage point as the risk of inflation accelerating in the near-term seems minimal, Cowan at Citigroup said in an interview.

To contact the reporter on this story: Sarah McGregor in Nairobi at  smcgregor5@bloomberg.net.

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