Kenya’s central bank left its key lending rate unchanged at 18 percent on Wednesday, saying inflation was still above the government’s short-term target of 9 percent and that private sector credit growth remained too high.
Although year-on-year inflation ticked down for the fourth straight month in March to 15.61 percent, analysts had been expecting the bank to hold the rate due to festering upside risks from higher oil and food prices.
“The wide current account deficit and rising crude oil prices… remain a threat to both continued exchange rate stability and further easing of inflation pressure,” the bank’s rate-setting committee said in a statement.
Policymakers in the region’s biggest economy had reestablished macroeconomic stability after a bloody post-election crisis at the start of 2008 hammered growth. However last year’s monetary policy failures dismayed markets and foreign investors ahead of a crucial election due in March, 2013.
The committee also cited a delay in the country’s rainy season that typically begins at the end of March, which it said pointed to further potential pressure on food and energy prices. Much of Kenya’s electricity is generated from hydropower dams.
The shilling was unchanged after the decision was announced, with currency traders saying a hold had already been priced into the market, Reuters reported.
The central bank said interbank rates remained high and pledged to actively intervene in the markets to reduce the volatility in the rate and to bring it closer to the central bank’s rate. The interbank rate fell to 18.8 pct on Tuesday from 21.8 pct a day earlier. “The CBK (central bank) will continue its interventions through Open Market Operations more actively to reduce the volatility in the interbank rate and bring it closer to the CBR,” the bank said in its MPC’s statement.
Razia Khan, head of Africa research at Standard Chartered, said inflation was still seen on a comfortable enough downward trend to allow the central bank to resume an easing cycle eventually.
“With this statement we have clear parameters for what would need to change to make the CBK more comfortable with easing,” Khan said.