High interest rates to persist as CBK retain its lending rate at 18 per cent

By Ben Kinyanjui

The Central Bank of Kenya (CBK) has maintained its lending rate at 18 per cent despite the stable exchange rate and a slow down in inflation. High interest rates have affected housing

CBK monetary policy committee meeting Thursday decided to maintain that high level to consolidate gains made in containing inflation that stand at 18.3 per cent down from 18.9 per cent in December last year.

“This will allow time for the policy measures in place to work out and deliver decisive results on inflation and inflation expectations,” said a statement issued by Prof Njuguna Ndung’u, CBK governor.

Curiously, the committee said the move is also needed to ensure inflation declines to levels consistent with the government target that is below 10 per cent and five per cent by 2014.

Analysts say this is a tall order as most of the drivers of inflation and especially food prices are determined by factors beyond the monetary policy.

A World Bank food index report released Tuesday says global food prices are likely to decline but remain volatile this year. In the fourth quarter of last year, prices of maize that is the main stable food in Kenya rose 117 per cent.

The weather department has also warned of a dry spell and frost in the first quarter of this year, a situation that may cut food supply and push prices up and fuel inflation higher.

“This presents risks to agricultural production and food supply,” says CBK.

The only consolation is the global economic slowdown that has dampened demand for oil leading to lower oil prices in the global market. However, local pump prices remain high leaving transport costs almost unchanged.

The bank however said the tight monetary policy had succeeded in curtailing private sector credit growth though it has also effectively slowed economic growth, a situation that may lead to higher unemployment and plunge thousands of people into poverty.

The Government’s plan to borrow a Sh6 billion loan from external sources is also likely to ease pressure on interest rates with interest rates on Treasury bills expected to decline.

It is not yet clear when the loan deal will be concluded but the World Bank Vice President in charge of sustainable development Ms Rachel Kyte is in the country and is expected to hold discussions with President Mwai Kibaki and Prime Minister Raila Odinga.

The two may opt to ask the bank to provide the funds that are earmarked for infrastructural projects mainly in roads and energy.