As monetary policy decision makers in Kenya and Uganda meet this week, borrowers will be watching closely to see the likely direction that interest rates will take in the coming months.
The central bank Monetary Policy Committees (MPC) of both countries are expected to meet on Monday and Tuesday to set the Central Bank Rate (CBR). Ordinarily, commercial banks should use the CBR to benchmark the interest they charge customers.
Data shows the cost of borrowing in Kenya has hit a two-year low, at an average of 16.96 per cent as lenders continue to cut their rates, urged on by improving economic indicators.
Borrowers in Uganda are currently paying at least 24 per cent interest on loans while in Rwanda and Burundi they are paying an average of 20 per cent. Banks in Tanzania are charging at least 21 per cent interest on loans.
Latest inflation data for the two countries released this week show inflation rates rising for the three months ending in October.
In the last MPC meeting held at the beginning of October, Bank of Uganda left the CBR steady at 12 per cent, the same level as in September after increasing it from 11 per cent in August.
“We usually expect heavy corporate demand for dollars from September till December but this year has disappointed on that front. This could indicate that the economy is weaker than expected and could exert more influence on key fundamentals like inflation and interest rates in a bigger way than monetary policy,” said Abu Mayanja, an independent economist and financial analyst.
“The next CBR announcement will hardly affect interest rates because most banks still rely heavily on their cost of funding to price their loans. But yields on government paper will remain on the low end due to rising demand from offshore players,” said Patrick Mweheire, executive director of Stanbic Bank Uganda.
The Central Bank of Kenya in its last meeting held at the beginning of September, decided to leave the CBR at 8.5 per cent, a level that has been maintained since May this year after it effected a one percentage point cut from 9.5 per cent.
“The CBR is likely to remain at 8.5 per cent until next year, although some disappointment over the short rains and a modestly higher inflation profile suggest that the first rate hike may come in March 2014,” said Razia Khan, head of regional research, Africa at Standard Chartered Bank, in a research note.
Drop in inflation rates
The Uganda Bureau of Statistics and the Kenya National Bureau of Statistics last week reported that the inflation rate fell to 8.1 per cent and 7.6 per cent respectively. Uganda’s inflation rate stood at 3.6 per cent in June before prices of basics started rising more rapidly to hit 8.4 per cent in September.
On the other hand, in Kenya, prices of basics rose by 4.5 per cent in May but by September, the inflation rate hit 8.29 per cent after the government introduced VAT on previously exempt or zero-rated goods.
Kenya’s benchmark rate had remained at the 9.50 per cent level between January and the end of April and with an expected increase in food prices CBK could choose to maintain the same rate for now.
Uganda’s statistics agency said that core inflation — which does not track food and fuel price increases — decreased to 7.2 per cent last month from 7.4 per cent in September while the food crops inflation rate declined to 14.3 per cent from 16.2 per cent over the same period.
“Given that food prices have stabilised, we are likely to see a further reduction in the inflation rate. We are forecasting annual headline inflation for November to fall to 7.5 per cent while core inflation will decline to 6.8 per cent. The exchange rate will also enjoy some stability due to seasonal remittances from Ugandans living abroad and the resumption of aid flows coupled with limited movements in interest rates,” said Lawrence Bategeka, senior research fellow at the Economic Policy Research Centre.
BoU and the CBK regulators will be meeting at a time when the cost of living in all the East African countries, with the exception of Tanzania, has been on an upward trend. Rwanda reported an inflation rate of 5.1 per cent in September, a faster pace than the 4.04 per cent registered in August.
Tanzania’s inflation rate has however been on a consistent downward trend, falling from a high of 12.1 per cent in December last year to 6.1 per cent in September.
Additional reporting by Bernard Busuulwa