Bloomberg News

Kenya May Cut Policy Rate After Inflation Slowed to Two-Year Low

November 05, 2012

Kenya’s central bank may lower its benchmark interest rate for a third consecutive meeting as inflation at a two-year low widens the room for policies to stimulate growth.

The Central Bank of Kenya, led by Governor Njuguna Ndung’u, will probably reduce its benchmark interest rate by 2 percentage points to 11 percent, according to the median estimate of three economists surveyed by Bloomberg News. The central bank is expected to publish its decision tomorrow via e-mail after 3 p.m. in Nairobi, the capital.

Inflation slowed to 4.1 percent last month, the lowest since November 2010, as good rains boosted food supplies, ending a drought. The central bank reduced its key lending rate in July and September by a total of 5 percentage points, reversing a tight monetary stance adopted in 2011 when it raised the policy rate to a record 18 percent to quell inflation.

“The dramatic fall in the consumer price index as well as data suggesting a weaker-than-expected recovery in gross domestic product” underpins expectations of rate cuts, Razia Khan, head of Africa economic research at Standard Chartered Plc in London, said in an e-mailed response to questions.

Kenya’s benchmark rate compares with 12.5 percent in neighboring Uganda, where the central bank has lowered borrowing costs eight times this year to spur the economy as inflation slows.

Kenya’s economy grew 3.3 percent between April and June, the slowest pace in 10 quarters. It’s expected to accelerate in the second half of 2012, according to Finance Minister Robinson Githae. The government forecasts growth of 5.1 percent this year and 5.6 percent in 2013.

Election Due

Kenya, the world’s largest exporter of black tea, relies on agriculture to generate a quarter of its gross domestic product.

The central bank may lower borrowing costs again in early 2013 before elections scheduled for March 4, Khan said. The Monetary Policy Committee normally meets every two months.

The bank has taken steps to support the currency this year by mopping up liquidity in the financial markets through almost daily offerings of repurchase agreements and by taking term auction deposits.

Kenya’s shilling is little changed against the dollar this year and traded at 85.55 yesterday. The currency’s plunge last year helped cause a surge in inflation, which peaked at almost 20 percent a year ago.

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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