The Kenya Bankers Association (KBA) is asking for a hold in interest rates ahead of Thursday, 29th September’s Central Bank of Kenya Monetary Policy Committee meeting.
KBA cites the following developments as a warrant for sustaining the interest rates:
- That while the current overall inflation remains elevated (above the government’s upper target limit of 7.5%) inflationary expectations are easing largely, driven by a decline in global oil prices.
- Economic activity softened in the second and third quarters of 2022 on election jitters and uncertainty, despite a stellar performance recorded in the first quarter.
- Private sector credit growth sustained strong double-digit growth rates for the fourth month in a row in June, projecting stronger impetus to economic growth in the coming months.
- There is notable improvement in the economy’s external sector performance, with a slight narrowing of the current account deficit ratio to GDP, driven largely by improvement in global oil and other commodity prices.
The Association reiterates that maintaining the interest rate at 7.5% will go a long way in anchoring inflationary expectations and protecting the ongoing economic recovery.
The pressure for CBK to raise the benchmark lending rate from the current 7.5 points stems from higher interest rates in developed economies, which has triggered portfolio outflows by foreign investors from emerging and frontier markets.
Continued rate hikes by the United States (+0.75%) and Switzerland (+0.75%) is expected to exacerbate the outflows compounding on not just financial flows into the country but also the exchange rate.
The CBK raised its benchmark rate by 0.5% at the end of May to anchor inflation expectations.
Inflation has, nevertheless, hit 8.5% to stand above CBK’s ceiling of 7.5% informing the need for recourse by the apex bank to assure price stability.
While higher interest rates may cushion against further portfolio outflows, hiking the benchmark interest rate would result in greater borrowing costs for not just household and firms but also government.
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