Kenyan Central Bank Signals Rates on Hold as Inflation Slows

Updated on
  • Central bank lowered key rate by 100 basis points last month
  • Inflation rate at 5 percent in May from 8 percent in December

Kenya’s central bank signaled it will keep interest rates unchanged after inflation slowed to within the government’s target range.

The bank last month cut its benchmark lending rate by one percentage point to 10.5 percent, the first reduction in three years, as consumer-price growth eased to 5 percent, the slowest pace since June 2013. Inflation will probably remain steady even as fuel costs rise and after the Treasury announced tax increases in this month’s budget, central bank Governor Patrick Njoroge said Tuesday.

“The monetary policy stance will remain neutral, ” Njoroge told reporters in the capital, Nairobi, at his first media briefing since the May 23 rate decision. “Inflation is smack in the range that we have been targeting.”

The central bank’s Monetary Policy Committee raised interest rates twice last year to 11.5 percent to curb inflation that peaked at 8 percent in December. The government targets inflation in a range of 2.5 percent to 7.5 percent. The MPC is scheduled to next meet on July 25.

Njoroge is trying to play down expectations that the MPC is going to cut rates “aggressively,” Mark Bohlund, Africa economist at Bloomberg Intelligence in London, said by phone.

“I expect another cut, but not in July, maybe later in the year,” Bohlund said. “He will probably want to wait to see what impact the previous cut has and how inflation behaves.”

East Africa’s biggest economy has budgeted to spend 2.3 trillion shillings ($22.7 billion) in the fiscal year through June 2017 and to collect 1.5 trillion shillings in revenue to fund the expenditure. The International Monetary Fund has warned that the nation’s failure to narrow its deficit, which is estimated at 9 percent of national output, could inflate borrowing costs when Kenya starts negotiations with international markets to sell bonds.

Kenya expects growth to accelerate to 6 percent in 2016, compared with 5.6 percent in 2015.

(Updates with analyst comment in fifth paragraph.)
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