(Updates with latest shilling rate in 11th paragraph.)
Feb. 2 (Bloomberg) -- Kenya’s central bank rejected demands from borrowers to follow neighboring Uganda in lowering interest rates from a record high, threatening to undermine growth in East Africa’s largest economy.
Kenya’s Monetary Policy Committee, led by Governor Njuguna Ndung’u, left the key lending rate unchanged for a second month at 18 percent, it said in an e-mailed statement yesterday from the capital, Nairobi. Uganda’s central bank lowered its policy rate for the first time since it was introduced in July, cutting it by 1 percentage point to 22 percent.
“Investors are complaining about high interest rates at the moment, but I suspect that will become a shriek soon,” Aly-Khan Satchu, chief executive officer of Nairobi-based investment company Rich Management, said in a phone interview. “It’s a certainty that the real economy will slow down.”
Policy makers in Uganda and Kenya have struggled to combat inflation after the worst regional drought in 60 years boosted food prices in both nations and their currencies slumped. Uganda’s central bank pushed up borrowing costs by 10 percentage points in four meetings, beginning in August. Kenya raised its key rate by 12.25 points in six meetings.
Kenya’s government estimates the economy will expand 5.3 percent this year, down from a previous estimate of 5.7 percent.
‘Kenyans Are Fed Up’
The MPC needs to “ensure that inflation declines to levels consistent with the government’s target,” Ndung’u said in the statement yesterday. Inflation slowed for a second month to 18.3 percent in January, compared with the government’s goal of below 10 percent within a year.
“Kenyans are fed up with these high loan rates because it’s an important link for them to get capital for a business, and to stop living hand to mouth,” Stephen Mutoro, secretary-general of the Consumers Federation of Kenya, said in a phone interview from Nairobi yesterday. “This recent fluctuation has gone too high, too fast.”
Lawmakers in Kenya are studying proposed legislation that would cap commercial banks’ interest rates on loans at 4 percentage points above the central bank’s rate. Lenders, including Equity Bank Ltd., have raised their base lending rates to as high as 25 percent.
In Uganda, where inflation slowed for a third month to 25.7 percent in January, higher interest rates have also taken their toll. Shop owners in Kampala closed their stores for four days last month to protest against soaring commercial bank rates of as high as 35 percent. They ended the strike after President Yoweri Museveni asked the central bank governor to study commercial bank interest rates.
“The Bank of Uganda is determined to bring down inflation sharply and to stabilize it around the policy target of 5 percent in the medium term,” Governor Emmanuel Tumusiime- Mutebile said. “The increase in interest rates implemented by the Bank of Uganda since the middle of last year has already yielded positive results.”
Higher interest rates in both nations helped to boost their currencies by a fifth since the beginning of October. Uganda’s shilling weakened for a second day today, falling 0.1 percent to 2,335 per dollar by 9:05 a.m. in Kampala, while Kenya’s currency gained for an eighth day, climbing less than 0.1 percent to 83.60 against the U.S. currency.
Central bank governors from the five-nation East African Community of Kenya, Tanzania, Uganda, Rwanda and Burundi agreed in October to coordinate policy actions to fight rising prices and currency volatility.
Economic growth in East Africa probably slowed to 5.1 percent last year from 5.9 percent in 2010 as the European debt crisis worsened, according to the East African Community, the regional trade bloc.
--With assistance from Fred Ojambo in Kampala. Editors: Nasreen Seria, Gordon Bell, Paul Richardson.
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