Kenyan rate decision too close to call after inflation slows

Kenya's rate decision next week is finely balanced with half the analysts polled by Reuters predicting a cut and half saying the bank will remain cautious despite a fall in inflation in February. Those forecasting rates to stay at 18 percent for a third month said the bank had warned of upside risks to inflation last month and was still restoring its inflation-busting credentials after tightening policy too late last year.
Those predicting a cut said the bigger-than-expected fall in inflation to 16.7 percent in February had given the central bank an opportunity to signal the start of an easing cycle and take some pressure off east Africa's largest economy. The central bank embarked on an aggressive tightening of policy in September last year after the shilling slumped through a series of record lows against the dollar and inflation surged towards 20 percent. It raised its Central Bank Rate from 6.25 percent at the start of September to 18 percent by December 1.
Coupled with measures to suck liquidity out of the market, the shilling recovered from a record low of 107 against the dollar in October to trade as high as 82.30 last month.
Inflation, too, has slowed for three straight months from a November peak of 19.72 percent to hit 16.7 percent last month, below the consensus forecast of 17.5 percent in Reuters poll.
"The recent acceleration lower in inflation gives the central bank a small opening," said independent analyst Aly Khan Satchu. "It's finely balanced but the real economy is a pressure cooker and I think the governor would be astute to let some steam out," he said.
All the analysts agreed the next move in rates would be down, but some said it was too early for the bank to cut as dry weather and higher global oil prices could well put pressure on food and fuel prices in Kenya again.
Last month, the central bank warned that while private sector credit growth has started to decline it had further to go. It also said risks to food supplies, shocks to the oil price and uncertainty over the euro zone crisis suggested caution.