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Kenya Holds Policy Rate for Second Time Amid Inflation Risks

Kenya’s central bank left its benchmark interest rate unchanged, taking a pause from monetary easing for a second time amid inflationary pressures.

The Monetary Policy Committee, led by Governor Njuguna Ndung’u, kept its key lending rate at 8.5 percent, the Nairobi-based Central Bank of Kenya said in an e-mailed statement today. Six economists in a Bloomberg survey forecast the decision, while one predicted a 50 basis-point cut.

“The authorities are still keen to stimulate credit growth in order to support the recovery, but will see limited room for easing in this cycle given where inflation is likely to trend,” Razia Khan, head of African economic research at Standard Chartered Plc in London, said in e-mailed response to questions before the rate decision was released.

Inflation accelerated for a third month to 6.7 percent in August from 6 percent in July, edging closer to the upper end of the government’s target range of 2.5 percent to 7.5 percent.

Kenya’s meteorological agency said “depressed” and poorly distributed showers are forecast for the October to December so-called short-rains period, which may affect farming regions that produce dietary staples such as corn. Food carries a 36 percent weighting in the consumer price basket.

The inflation rate may jump to 10 percent this month as the government enacts a law that cuts the number of items exempt from the 16 percent value added tax to 10 from about 300, Nairobi-based AIB Capital Ltd. said in an e-mailed note today.

Inflation Target

“Inflation has gone up beyond the government’s mid-point target of 5 percent and it is expected to climb further on increasing food and fuel costs,” Vimal Parmar, head of research for Nairobi-based Burbidge Capital, said by phone. “The new VAT law will also add pressure to inflation and the rate could cross 8 percent by the end of the year.”

Price pressures are also stemming from a weaker shilling, which raises the cost of imported goods paid in dollars. The currency has fallen 1.7 percent against the U.S. currency this year, according to data compiled by Bloomberg.

The shilling traded unchanged for a second day at 87.55 per dollar by 5:01 p.m. in Nairobi.

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