Bloomberg News

Kenya Keeps Key Rate Unchanged, Citing Supply-Side Inflation

July 27, 2011

(Updates with comment from the central bank in the third paragraph.)

July 27 (Bloomberg) -- Kenya’s central bank unexpectedly left its benchmark interest rate unchanged, saying that inflationary pressures couldn’t be curbed by tighter monetary policy.

The Monetary Policy Committee kept the key lending rate at 6.25 percent, the Nairobi-based central bank said in an e-mailed statement today. Only one of seven economists surveyed by Bloomberg forecast the decision, with the others predicting an increase of as much as half a percentage point.

“The committee observed that the tight monetary policy stance would not achieve the desired results at the moment if the supply sides of food, fuel and energy were not effectively being managed,” the bank said.

Policy makers raised rates by a quarter point at their two previous meetings in March and May to limit price growth. The increases did nothing to prevent a drought pushing up food costs and higher international oil prices from raising transport costs. Inflation accelerated for the eighth consecutive month in June, reaching to 14.5 percent, damping personal and corporate spending.

Inflation Peak

“The central bank believes that inflation will peak soon, and then come down on its own as food has been a big factor in raising inflationary pressure,” Phumelele Mbiyo, head of East African macroeconomic research for Nairobi-based CFC Stanbic Bank Ltd., said by phone today. Mbiyo predicted the rate would remain unchanged.

The Kenyan shilling fell to the lowest level since July 12 after the decision, weakening as much as 0.4 percent to 90.75 per dollar in Nairobi, the capital, compared with yesterday’s close of 90.38. It was trading at 90.68 at 5:30 p.m.

Tighter monetary policy has led at least four Kenyan lenders to raise their base lending rates since last month, even as Central Bank of Kenya Governor Njuguna Ndung’u, President Mwai Kibaki and Finance Minister Uhuru Kenyatta appealed to them to lower borrowing costs to stoke economic growth.

Commercial lending rates currently average 13.9 percent, while banks pay savers 1.38 percent on their deposits, according to the Central Bank of Kenya’s website.

The government forecasts that economic growth will ease to 5.3 percent this year from 5.6 percent in 2010, as dry weather reduces farm output, which accounts for a quarter of the economy in the world’s largest exporter of black tea.

Economic growth slowed to 0.5 percent in the first quarter on a seasonally adjusted basis, compared with 2.2 percent in the previous three months.

It’s a “very disappointing decision by the MPC,” Razia Khan, head of Africa economic research at Standard Chartered Plc in London, said in an e-mailed note. “The markets were looking for a clear sign of their tightening intent, given the mixed messages of the recent past. They have not delivered this.”

--Editors: Philip Sanders, Karl Maier, Ben Holland

To contact the reporters on this story: Sarah McGregor in London at smcgregor5@bloomberg.net; Paul Richardson in Nairobi at pmrichardson@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net


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