THE Central Bank is expected to drastically cut its interest rate at a meeting tomorrow after inflation fell to a 19-month low in August, giving policymakers the confidence to take aggressive measures to jumpstart growth, a Reuters poll showed All nine analysts polled by Reuters expect the Central Bank of Kenya to cut its policy rate after year-on-year inflation fell for the ninth straight month in August to 6.09 percent, the lowest since January 2011, and a sharper fall than analysts' expectations.
Last year soaring inflation and volatile currencies in east Africa's three largest economies -- Kenya, Tanzania and Uganda -- forced policymakers to impose aggressive monetary tightening measures to reign them in. Kenya's Monetary Policy Committee ramped up the Central Bank rate by 11 percentage points in the last quarter of 2011 to 18 per cent and held it there for seven consecutive months, before cutting it to 16.5 per cent in July.
The aggressive stance paid off. Inflation dropped dramatically and the currency stabilised in the year-to-date, but at the expense of economic growth which slowed to 3.5 per cent in the first quarter of 2012, from 5.1 per cent a year earlier, the slowest first quarter growth since 2008. Two analysts expected a cut of 250 basis points and three said it would fall by 300 basis points. Two analysts predicted a cut of 450 basis points. "The MPC has successfully tamed inflation via its extreme interest rate regime," said Aly Khan Satchu, an independent analyst based in Nairobi.
"Now with inflation at 6.09 per cent, the economy is in danger of coming to a screeching halt. With stress levels spiking, the MPC needs to act as aggressively on the way down as it acted last year on the way up." A spike in non-performing loans among commercial banks to Sh57.5 billion in the second quarter of 2012, from Sh53.7 billion in the first quarter, underlined the damage from the high interest rate regime.
Razia Khan, head of Africa research at Standard Chartered, said despite the lower inflation numbers, the high current account deficit was a concern authorities needed to consider. Kenya's current account deficit stood at 11.3 per cent in May, which is high compared to other 'B' rated countries according to Fitch ratings agency.
"Kenya's economy will benefit from further stimulus, but the speed of the provision of that stimulus is likely to be carefully controlled," Khan said. "With the CBK still sterilising liquidity through open market operations, the case for not doing anything dramatic, that might upset foreign exchange stability, remains," she said.