CBK holds rates against market expectations
06 August 2015, 10:42
Nairobi - Central Bank of Kenya surprised the markets on Wednesday by keeping its benchmark lending rate unchanged at 11.50 percent to allow recent tightening to fully take effect.
The median forecast from a Reuters poll of 11 analysts suggested the central bank would lift interest rates by 50 basis points to 12 percent to support the shilling.
"As a knee-jerk reaction, we expect the Kenyan shilling to weaken on this news, given market expectations of a tightening," said Razia Khan, head of research for Africa at Standard Chartered in London.
Policymakers have raised the rate by a total of 300 basis points since June after the shilling weakened sharply against the dollar mainly due to expectations of a U.S. rate hike, lower export earnings and a surge in imports.
The central bank's Monetary Policy Committee (MPC) said in a statement the measures had "yet to be fully transmitted to the economy".
The shilling was unchanged at 100.75/85 after the decision in after-hours trading, market participants said.
Volatility in the exchange rate at the start of last month has subsided, the MPC said, partly reflecting the impact of the central bank's aggressive mop-up of excess liquidity and its interventions through sale of dollars to banks.
Year-on-year inflation fell unexpectedly last month to 6.62 percent from 7.03 percent in June, offering policymakers further comfort.
Khan of Standard Chartered however said she still expected it to rise above the central bank's preferred band of 2.5-7.5 percent, meaning the tightening cycle might not be over yet.
"This likely pushes out any interest rate tightening to future MPC meetings when the pressure on inflation is more clear, and less clouded by seasonal influences," she said.
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