Will Central Bank lower lending rate?
Last updated on 5 Jul 2012 00:00
By MORRIS ARON
Whether the Monetary Policy Committee (MPC) decides to increase, reduce or maintain a key rate when it meets today will signal the direction the cost of credit should take.
Analysts who spoke to The Standard reckoned that MPC should cautiously begin to reduce the Central Bank Rate (CBR) — the rate that determines the cost of credit — in line with a trend depicted by key economic indicators in the recent past.
“The MPC should reduce the CBR by 150-200 basis points in view of the reduction in inflation, but maintain a continued tight monetary stance in view of the external environment,” said Sunil Sanger, an independent analyst.
“A tight monetary policy is, however, not equal to CBR of 18 per cent.”
Statistics indicate that since MPC adopted a tight monetary policy stance by maintaining the CBR at 18 per cent for six consecutive sessions leading to cost of credit soaring to an average of 23 per cent, inflation has significantly dropped to 10 per cent, short of the targeted nine per cent.
The shilling has also strengthened and is currently stable at Sh84 to the US dollar.
“The economy is growing at its slowest pace since the first quarter in 2008 when it was at a standstill. Inflation’s back has been broken. It is time to cut the Central Bank Rate,” said Alykhan Satchu, an investment analyst with Rich Management.
Nikhil Hira, a partner at Deloitte, said the high interest regime is having serious impact on businesses looking to expand or are servicing debts.
“They (Central Bank) were in the market mopping up liquidity but inflation is not yet at target of nine per cent,” said Halima Saadia of Old Mutual.