The Central Bank of Kenya's Monetary Policy Committee will be meeting today for the first time since setting the bi-monthly meetings. The last time the committee met in June, they reviewed the Central Bank's base lending rate downwards to 16.5% from 18%. The MPC cited downward trends in inflation which stood at 10.1% in June as the reason for slashing the CBR by 1.5 per centage points.

Inflation rates have since dropped to 6.09% in the month of August according to Kenya National Bureau of Statistics' monthly reviews. KNBS attributed the drop to decrease in Food and Non Alcoholic drinks index by 1.09%. This drop is attributed to decrease in the prices of a number of food products. The prices of tomatoes (-7.4%), milk(-3.3%), potatoes(-5.3%), maize flour(-2.4%), cabbages(-6.9%), carrots(-7.6), spinach(-5.2%) and onions (-4.1%) all declined between July and August 2012.

Interest Rates

The last review by MPC saw commercial banks cut their base lending rate by a similar margin. We expect that the MPC will lower the CBR further as has been predicted by several industry players. This expectation is pegged on the fact that the inflation rate now stands much lower the MPCs earlier projections of having it at 9% by the end of the year.

Opinion by some quarters sector note that the MPC will tread carefully when it comes to rate cuts owing to trends in international fuel prices. Stoke Brokers Genghis Capital note that the Committee could slice the rate by 2 per centage points at most since the international prices of crude oil prices have increased due to sanctions on Iranian supplies. The regional regional downward trends in inflation could also be a reason for a slash in the base lending rate.

Borrowers could be relieved with a 2% cut of the CBR if commercial banks brought their lending rates lower than the 20% current average by the end of the year.