Kenya c.bank seen cutting rates by 200 basis points

NAIROBI (Reuters) - Kenyan policymakers are expected to slash the central bank's lending rate by two percentage points at their November meeting, to lower lending costs and give the economy a vital boost, a Reuters poll showed on Monday.

The central bank's rate-setting committee, which embarked on a monetary easing cycle in July, is scheduled to meet on November7, amid on-target inflation and a stable exchange rate.

The 12 analysts and market participants surveyed said they expected the committee to cut the benchmark Central Bank Rate (CBR) by a median forecast of 200 basis points to 11 percent. They have cut the rate by a total of five percentage points over two meetings since July.

"With inflation likely to remain in low single digits for a while, and the KES stable thanks to the sterilisation of liquidity... the CBK will be comfortable cutting interest rates by a sizeable amount yet again," said Razia Khan, head of research for Africa at Standard Chartered in London.

Year-on-year inflation fell to 4.14 percent last month from 5.32 percent in September, after food prices rose at a slower pace than the previous month.

A senior Treasury official told Reuters last week that inflation was "where we want it to be". The Treasury has an inflation target of 5 percent over the medium-term.

Geoffrey Mwau, who is the economic secretary at the ministry of finance said despite the drop in inflation, easing was likely to be gradual to ensure credit expansion does not outpace growth in the real economy, to avoid overheating.

The prevailing stability in the exchange rate could however create ample room for the Monetary Policy Committee (MPC) to adopt a very dovish stance in order to boost economic growth, one analyst said.

"With the currency stability we have seen since the beginning of the year and the subsidence of inflation, the MPC can, and probably will, be more aggressive in seeking to boost aggregate demand," said Phumelele Mbiyo, regional head of research at CFC Stanbic bank.

The shilling has traded within a band of 82.00-85.00 this year, thanks to the central bank's tight monetary stance, accompanied by frequent liquidity absorption moves through repurchase agreements (repos) and term auction deposits.

The shilling was trading at 85.45/65 on Monday.

At the same time, economic growth flagged during the first-half of the year with the second quarter growth outturn of 3.3 percent being the slowest quarterly growth since the last quarter of 2009, official data showed.

"With the March 2013 election close, there is also likely to be pressure on the CBK to adjust downwards the policy interest rate, which would also help lower government debt servicing costs," said Angus Downie, head of economic research at Ecobank.

Voters elect a president, parliament, senate and local governments in the exercise, which has already put pressure on the government's finances for this fiscal year.

Last month, the state took a loan of 7 billion shillings from a local commercial bank to fund the purchase of voter registration kits.

Still, analysts said the policymakers, mindful of the impact of the external environment on the economy, could be measured in their action when they meet on Wednesday.

"A more aggressive cut to the CBR greater than 200 basis points is unlikely because of uncertainties over global oil and food prices, as well as the ongoing adverse impact on Kenya's trade caused by the eurozone crisis," Downie said.

Most poll respondents said there was scope for more rate cuts in the run-up to the elections in March, especially if economic growth fails to pick up in the third quarter.

Source: http://news.yahoo.com/kenya-c-bank-seen-cutting-rates-200-basis-135526527--business.html

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