CBK monetary policy committee meets for the first time this year with the shilling stable against major world currencies

By Ben Kinyanjui

The Central Bank policy committee is expected to stay the bank lending rate at 18 per cent when it meets Monday to review progress made in containing the high inflation.High interest rates charged by commercial banks have slowed down economic activity

They also met at a time when the shilling has recovered substantial ground against the world majors, coming from Sh105 to the dollar to over Sh87 on Tuesday.

Thought analysts and forex dealers say it is still early to celebrate the turn of events and warns that the shilling could slide further as economy start to pick up; the committee can put a smile on the face and face its critics.

However, CBK that came under heavy criticism late last year for what was perceived as delayed intervention to save the shilling from falling due to a combination of both local and international might as well surprise many by hiking its lending rate.

Though the tight monetary stance has helped to slow down inflation from a high of 19.7 in November to 18.9 per cent a month later, the seven per cent target by the end of this year seems a tall order.

Though food supply has improved with the on-going rains, prices for most staple foodstuff like maize, rice and wheat still remain high due to high cost of production and transport costs.

The committee headed by CBK governor Prof Njuguna Ndung’u will however take pleasure in the falling oil prices in the international market. The Energy Regulatory Commission has already announced a projected drop in pump prices early next week.

During the last MPC meeting in early December, the committee noted that the tight measures had succeeded in stabilising the exchange rate but inflation had remained high.

“The committee noted that although supply shocks continued to drive domestic prices upwards, demand driven inflation pressure originating from the growth of private sector credit continued to persist,” said Prof Ndung’u.

“In addition it was noted that there were exchange rate risks emanating from uncertainty in the global financial markets due to the debt crisis in the eurozone.”

Analysts say raising the rate higher would only fuel the economic slowdown that started in the third quarter of last year as commercial banks reacted to the higher lending rate by raising interest rates on loans.

Key sectors of the economy including building and construction have recorded a decline, rendering thousands of people unemployed. Reduced imports also means consumption has gown down.