Bloomberg News

Kenya Set to Make Biggest Rate Cut, Driving Yields Down

September 04, 2012

Kenya’s central bank is set to make its biggest interest-rate cut on record to protect growth in East Africa’s largest economy, driving bond yields to all-time lows.

The Central Bank of Kenya, led by Governor Njuguna Ndung’u, will probably reduce its benchmark lending rate by 2.5 percentage points to 14 percent, according to the median estimate of nine economists surveyed by Bloomberg. The bank’s Monetary Policy Committee is due to announce the rate decision in an e-mailed statement after 3 p.m. in Nairobi, the capital.

Policy makers are reversing tack after six interest rate increases last year helped to bolster the shilling and bring the inflation rate down to an 18-month low. Growth in Kenya’s $34 billion economy is now coming under pressure as credit demand weakens and Europe’s debt crisis curbs tourism and cuts agricultural exports, Kenya’s main sources of foreign exchange.

“The central bank is facing pressure to encourage cheaper credit and help the economy,” Mutahe Karuoro, the head of money markets at Cooperative Bank of Kenya Ltd., said in a telephone interview from Nairobi. “The cut would see yields go down on government debt, and eventually it makes sense banks would offer lower lending rates.”

Kenya’s economy expanded 3.5 percent in the first quarter, the slowest pace in two years, and the government forecasts growth of 3.5 percent to 4.5 percent this year, compared with a 4.4 percent expansion in 2011.

Yields Slump

Yields on Kenya’s 12.705 percent shilling bond due June 2022 slumped 207 basis points, or 2.07 percentage points, in the past month to a record low of 10.81 percent yesterday. The yield on the 11.855 percent security due May 2017 has dropped 2.16 percentage points to 10.4 percent in the same period.

The central bank boosted the policy rate by 12.25 percentage points to 18 percent last year to halt the shilling’s decline after it plunged to a low of 106.75 against the dollar on Oct. 11. Inflation peaked in November at 19.7 percent as the worst regional drought in 60 years pushed up food prices.

Soaring commercial bank lending rates curbed credit growth to 16.4 percent in June from 21.5 percent in the previous month, and boosted defaults. Non-performing loans increased 7 percent to 57.5 billion shillings ($683.7 million) in the first half of the year, according to the central bank.

The shilling has gained 16 percent against the dollar since the beginning of November, while inflation eased to 6.1 percent in August, giving the central bank room to cut interest rates for a second time this year. The forecasts for today’s reduction range between 200 basis points and 450 basis points.

‘Excess Liquidity’

“The central bank has allowed excess liquidity to build up in the system,” Phumelele Mbiyo, head of macroeconomic research for East Africa at CFC Stanbic Bank Ltd. in Nairobi, said in a phone interview yesterday. “If the central bank is looking to stimulate economic activity they will have to cut the rate.”

The central bank has reduced the frequency of its monetary policy meetings to six times a year from once every month, adding to expectations of a more aggressive interest-rate cut, Mbiyo said.

Policy makers are under pressure to help make loans more affordable for borrowers and boost economic growth before elections scheduled for March 4, said Ignatius Chicha, head of markets at Citigroup Inc. in Nairobi. In the last election in 2007, two months of ethnic violence left more than 1,100 people dead and uprooted another 350,000.

“There’s pressure from the government for rates to come down as an indicator to the market that commercial lending rates should also fall,” Chicha said in a phone interview. “There is an election coming up and the government wants to spur economic growth so individuals can feel a benefit.”

To contact the reporter on this story: Sarah McGregor in Nairobi at smcgregor5@bloomberg.net

To contact the editor responsible for this story: Nasreen Seria at nseria@bloomberg.net


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