Kenya May Hold Off Further Easing on Weak Shilling, Rate Cap

NAIROBI (Capital Markets in Africa) – Kenya’s interest-rate cap that has failed to stimulate private-sector lending and the nation’s falling currency may force the central bank to hit the brakes on its loosening monetary policy stance.

The Central Bank of Kenya’s Monetary Policy Committee led by Governor Patrick Njoroge may adopt a “wait-and-see approach” at its meeting on Monday in order to further assess the effect of a law passed in August that limits how much banks can charge for loans, according to Jacques Nel, an economist at NKC African Economics. The policy makers will probably leave the benchmark rate at 10 percent for a second consecutive time, according to all five economists surveyed by Bloomberg.

“If the law has not had the intended impact, it’s unlikely that any further eases in monetary policy will have the intended effects,” Paarl, South Africa-based Nel said in an e-mailed response to questions.

In a bid to rejuvenate lending, the central bank in East Africa’s biggest economy reduced its key rate to 10 percent in September after shaving off a total of 150 basis points in two moves. Private-sector credit growth shrugged off the cuts and maintained its falling trend, declining for 14 consecutive months to 4.5 percent in October from a year earlier, the slowest pace since June 2008, data from the regulator show.

Njoroge may have to hold off further loosening until a clearer picture of the impact of the rate law emerges, according to Nel. External risks and the depreciating shilling warrant a more prudent stance, he said.

Weak Shilling
The shilling has weakened against the dollar almost every trading day since Dec. 23, according to data compiled by Bloomberg. It depreciated after the U.S.Federal Reserve raised interest rates and as investors wary of election-related violence in Kenya grow increasingly cautious ahead of a presidential vote scheduled for August.

The currency could slide to 107.40 against the dollar by the year-end, according to Exotix Partners LLP. The shilling was up 0.1 percent to 103.85 in Nairobi by 2:58 p.m. Foreign-exchange reserves fell to a year-low of $6.85 billion on Jan. 19 from a peak of $7.87 billion on July 7, depleted by the central bank’s intervention to smooth the shilling’s decline.

Policy makers will vote to keep the rate unchanged despite concerns over slow credit growth, according to Razia Khan, head of Africa macro research at Standard Chartered Plc in London. 

“Recent foreign-exchange market volatility with pressure on the shilling will keep the central bank relatively cautious,” she said in e-mailed responses to questions. “We expect a rate cut of 50 basis points later this year.”

‘Reactive Policy’
Cutting rates is not “conducive” and risks a backlash from the markets, according to Gareth Brickman, a market analyst at ETM Analytics in Stamford, Connecticut. “It looks like for the foreseeable future the central bank will be in a bind of facing down growth risks and wanting to be more accommodative in conventional policy, but being dragged into a reactive policy stance as we saw back in 2015,” he said by e-mail.

While inflation has remained within the government’s target of 2.5 percent to 7.5 percent since February 2016, worsening drought conditions could feed through to consumer prices, he said. Price growth slowed to 6.4 percent in December and the statistics office will publish the January number on Tuesday.

“My view would be for the base rate to stay unchanged for the foreseeable future with the material risk of being hiked reluctantly to address acute foreign-currency and inflation problems as they arise,” Brickman said.