Kenya May Hold Key Rate to Stress Need for Cheaper Credit

The Central Bank of Kenya will probably maintain its policy rate to help narrow the disparity between commercial banks’ lending and deposit rates, even as inflation surges.

The Monetary Policy Committee will keep the benchmark interest rate unchanged at 8.5 percent, according to eight of 11 economists and analysts in a survey by Bloomberg News. The other three forecast an increase of half a percentage point. The bank is expected to announce its decision later today.

“The central bank has been trying to guide credit spreads lower and a pre-emptive rate hike now might undercut that message,” Aly-Khan Satchu, chief executive officer of Nairobi-based investment company Rich Management Ltd., said yesterday by phone.

The central bank has left its key lending rate unchanged since lowering it by 1 percentage point in May 2013, during which time the average lending rate charged by Kenyan commercial banks dropped to 16.9 percent from 17.5 percent. The rate paid on deposits has risen to 6.9 percent from 6.6 percent in the period. Commercial-bank lending rates surged to as high as 35 percent in 2012 after the bank raised its benchmark interest rate to a record 18 percent to support the currency.

Deputy President William Ruto said in April he wants a reduction in commercial bank lending rates to 10 percent or less by the end of next year.

Policy Transmission

The central bank in July introduced a pricing formula for commercial loans, which incorporates its benchmark rate, 91-day Treasury bill rates and a premium charged by lenders, to help ensure its monetary policy filters through to borrowers.

The central bank may decide to increase borrowing costs to help bring inflation back within the 7.5 percent upper limit of its target range, Robert Bunyi, managing director of Nairobi-based Mavuno Capital, said by phone. The inflation rate climbed to a more than two-year high of 8.4 percent in August.

“Over the past two years the central bank has realigned its monetary policy actions to focus more closely on lowering inflation,” Bunyi said. “They will only raise the rate this time if they are concerned about inflationary pressures.”

Inflation may slow in September after a one-time increase from the introduction of the value-added tax on a wider range of goods in September 2013 is stripped out, Nairobi-based Standard Investment Bank said in an e-mailed note.

The shilling weakened for a third day against the dollar, declining less than 0.1 percent to 88.65 by 9:44 a.m. in the capital, Nairobi, taking its losses this year to 2.7 percent.

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