Kenya Holds Key Interest Rate at 7% for Second Time

(Bloomberg) --

Kenya’s central bank held its benchmark interest rate for the second time in a row, saying policy steps taken to boost the economy were working.

The monetary policy committee retained the rate at 7%, Governor Patrick Njoroge said Thursday in an emailed statement from the capital, Nairobi. That matched the forecast of four out of the seven economists in a Bloomberg survey. One predicted a 25 basis-point cut and two expected 50 basis points of easing.

Key insights:

• Even though sub-Saharan Africa’s third-largest economy continues to expand, the pandemic has take its toll and economic growth probably slowed to a three-year low of 4.5% in the first quarter, according to the median of five economists’ estimates in a Bloomberg survey.
• Inflation slowed to 5.5% last month, from 5.6% in April, and has stayed inside the central bank’s target band of 2.5% to 7.5% since September 2017. The rate will remain within the range in the near term as food supply improves due to favorable weather conditions, lower international oil prices, the impact of lower valued-added tax and muted demand, Njoroge said. The central bank has cut its key rate by 200 basis points since November.
• While key foreign-exchange sources such as diaspora remittances, horticultural exports and tourism have been hit by the virus, the relaxing of Covid-19 restrictions in Kenya’s major markets and increased cargo capacity are expected to boost exports and support the shilling. The government is negotiating with the International Monetary Fund for a standby facility that will help cushion the economy.
• Diaspora remittances recovered in May to $258.2 million from $208.2 million in April.
• Horticulture exports are back to normal, increasing 22.7% in May from a year ago, as demand picked up and freight capacity increased. Tea shipments climbed 15.2% in May from a year earlier.
• Foreign-exchange reserves at $9.2 billion, or 5.53 months of import cover, continue to provide a buffer against short-term shocks, Njoroge said.
• The MPC will meet again in a month and may take additional measures as necessary, he said.

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