Central Bank of Kenya to hold rates on Monday, cut next quarter

JOHANNESBURG, South Africa, Capital Markets in Africa: Kenya’s central bank will wait a few more months before cutting its benchmark interest rate as inflation, while slowing, is still above target and so allows it room to wait, a Reuters poll found on Friday.

Eight of 12 analysts polled this week said rates would be left on hold on Monday at 11.5 percent while two said they expect a 50 basis point cut. The other two expect cuts of 100 and 150 basis points.

The central bank will lop off 75 basis points in the third quarter and another 25 in the fourth, according to median forecasts.

“Inflation is slowing down and the currency is broadly stable, there are still a number of pressure points on the external front,” said Gaimin Nonyane, chief economist at Ecobank Capital.

Kenyan interest rates have been unchanged for almost a year while consumer inflation has gradually slowed from its peak in December of 8.01 percent. The central bank aims to keep inflation between 2.5 and 7.5 percent.

“I definitely accept that there is a chance of a cut, but I expect that they will hold off and wait for another meeting to be sure that inflation has been anchored within the target range,” said John Ashbourne, analyst at Capital Economics.

Inflation in the East African economy is projected to slow in the next two years. Medians suggest it will be 6.3 percent this year, 6.0 percent next, and then slowing further to 5.3 percent in 2018.

Tight monetary policy has buoyed the shilling, making it one of the most resilient currencies in emerging markets during episodes of high risk aversion in the past six months.

Still, the U.S. Federal Reserve on Wednesday said its economy could be ready for another interest rate increase in June, changing sentiment in emerging markets that was starting to think a hike next month was out of picture.

“The main source of risk stems from continued uncertainty over the U.S. Fed interest rate cycle and falling tea prices,” Nonyane said.

Still, Kenya is shaping up to be Africa’s best performing economy amid hardship for its peers created by the recent commodity slump.

It outpaced Sub-Saharan Africa’s average growth rate of 3.8 percent in 2015, despite the tourist industry being hit by fears of militant attacks, by expanding 5.6 percent last year.

Growth in other parts of the continent has been stagnant — hit by a lack of confidence in Africa’s biggest economy, Nigeria, and South Africa, the region’s most developed.

“Kenya’s economy is much less dependent on commodities than most of its African peers … significant infrastructure investment is both adding to consumption and helping to boost productivity,” Ashbourne said.

“The Kenyan energy sector has been a real success in recent years, and the transportation sector is set for a real boost when the railway comes online.”

Source: Reuters African Online Report Business News