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CBK ups interest rates

NAIROBI, KENYA -- The Kenyan shilling last week strengthened against the dollar on a week the Kenyan Central Bank raised the key lending rate from seven per cent to 11 per cent signaling higher interest rates for borrowers.
CBK had been under pressure to raise the Central Bank Rate (CBR) as a short term measure of propping a weakening shilling that has seen a 25 per cent slide against the dollar this year.
The rise in CBR is expected to prompt commercial banks to further hike their base lending rates, having done so in the past two instances the CBK has raised the rate.
CBK at one point raised the Central Bank Rate (CBR) from 6.25 per cent to 8 per cent before reverting back to the former, prompting commercial banks to raise their lending rates.
Following a meeting of the CBK's policy organ, the Monetary Policy Committee (MPC) yesterday, the chief lender said the prevailing conditions warranted immediate action hence the decision to raise the CBR by 400 basis points.
“Decisive and immediate action is required from the monetary policy side to stem these inflationary pressures, stabilize the exchange rate and re-establish a healthy growth base,” said CBK Governor Prof Njuguna Ndung'u in a statement.
The Committee noted that earlier interventions in a bid to reverse the situation had not paid off as inflationary pressure continued to increase and that both the weakening of the shilling and its volatility posed additional threats to the country's economic growth prospects.
For instance, the MPC noted, second quarter growth for the country declined to 4.1 per cent hence the need for further intervention including raising the CBR by 400 basic points.
“The Committee considered that an enhanced tightening of the monetary policy stance was required at this time but observed that this needed to be complemented by the ongoing actions on the supply side with respect to food, fuel and energy,” said Prof Ndung'u.
He said these complementary actions should effectively signal relief to the supply constraints that have been driving inflationary expectations and adverse expectations with respect to the exchange rate.
The move by CBK came even as analysts made projections to the effect that Kenya's inflation will continue climbing until next January when it is forecast to peak at 20.7 percent.
Analysts at Pinebridge Investments also told journalists in Nairobi last week that consequently, economic growth is likely to slowdown to 3.5 percent in 2011 from 5.6 in 2010 on high inflation, interest rates and the weakened shilling.
“People with larger projects are likely to slowdown due to expensive money,” said Edward Gitahi, a senior investment manager with the Fund manager.
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