Bloomberg News

Kenya Central Bank Rejects Calls to Cut Record Rate

May 03, 2012

Kenya’s central bank rejected calls from politicians and businesses to cut its benchmark interest rate from a record as fuel prices increase, adding to pressure on inflation in East Africa’s largest economy.

The Monetary Policy Committee, led by Governor Njuguna Ndung’u, left the policy rate at 18 percent for a fifth consecutive meeting yesterday. Five out of seven economists predicted the decision, while two forecast a one percentage- point cut.

Prime Minister Raila Odinga last month added his voice to calls from businesses and consumers for lower borrowing costs. While the annual inflation rate fell for a fifth month in April to 13.1 percent, it’s still above the central bank’s target of bringing it down to 9 percent by June, limiting the scope to cut interest rates and spur growth.

“With this decision, the central bank isn’t acting on what the market wants or public pressure to lower rates, but the fundamentals,” Alexander Muiruri, a fixed-income analyst at Nairobi-based African Alliance Investment Bank Ltd., said in a phone interview yesterday. “Until the inflation numbers justify a move, they won’t move.”

The bank has kept its key rate unchanged this year after a drought and a slump in the currency prompted the MPC to boost the rate by 12.25 percentage points over six meetings in 2011. The central bank in neighboring Uganda, where drought spurred inflation last year, kept its key lending rate unchanged at 21 percent on May 2.

Inflation Pressure

The price of Persian Gulf Murban crude, the fuel imported for refining in Kenya, jumped almost 9 percent this year, prompting the government to raise regulated fuel costs twice. The current-account deficit, at 13.6 percent of gross domestic product, also poses a threat to the stability of the currency, threatening inflation, the central bank said.

“There is still some lingering pressure on inflation that could give rise to adverse inflationary expectations,” the MPC said yesterday. “These must be addressed to facilitate a return to high economic activity supported by a low inflation regime.”

High interest rates have drawn foreign investment and helped buoy the shilling, which has gained 28 percent since falling to a record 106.75 per dollar on October 11. The currency was trading at 83.06 per dollar by 6:48 p.m. in Nairobi yesterday, compared with 82.95 before the announcement.

Kenya is the world’s largest exporter of black tea and its flower shipments to Europe account for one third of sales there. The government said last month a weaker global economy may undermine its target of 5.2 percent growth in 2012, compared with an estimated 4.5 percent last year.

To contact the reporter on this story: Sarah McGregor in Nairobi at

To contact the editor responsible for this story: Andrew J. Barden at

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