Citi predicts Central Bank Rate cut on stable shilling and low inflation

The Monetary Policy Committee (MPC) is likely to cut rather than raise the benchmark lending rate this year owing to the stability of the shilling and lower inflation, analysts at Citi say.

The next MPC meeting will be held on March 21. During the last meeting in January, the Central Bank of Kenya (CBK) held the base lending rate and the Kenya Banks Reference Rate steady at 11.5 per cent and 9.87 per cent respectively.

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The MPC noted in the January statement that the inflation pressures were temporary, and that the monetary policy measures currently in place are containing any demand pressures in the economy.

The cut in public expenditure by the government in the budget policy statement and the resultant easing of pressure on domestic borrowing is also expected to lower pressure on interest rates.

“There is now less pressure on the CBK’s Monetary Policy Committee as inflation eased to 6.8 per cent year on year in February from 7.8 per cent in January and some fiscal consolidation is on the cards. While inflation pressures could linger for a while (due to higher food inflation), it seems possible that the next move in the policy rate will be down, not up,” said Citi economists Adriaan Du Toit and Kieran Govender.

“Easing of fiscal risks from the Budget Policy Statement could facilitate near-term shilling stability. The shilling remains vulnerable to a seasonal increase in dollar demand around May and June (possibly related to corporate annual dividend payments), but there seems to be some technical support for the unit in the near term.”

As a result of the revision in the policy statement, the fiscal deficit for the current year has been revised to eight per cent of gross domestic product from 8.8 per cent previously projected, while the net borrowing target from the domestic market has been revised down to 168.2 billion from the previous Sh221 billion.

Some economists had seen the Treasury’s fiscal policy as weighing down the monetary policy efforts by CBK to rein in currency volatility and interest rates.

The consolidation has, therefore, been welcomed as a good step towards harmonising the two policies, a move which should result in lower rates due to reduced domestic borrowing.

“The Treasury currently has minimal pressures to borrow from the domestic market. This has attributed to a cool-off in yields particularly on the short and intermediate end of the yield curve.

“We anticipate a further downward bias in yields in the weeks ahead as the government’s appetite remains neutral,” said Genghis Capital fixed income analyst Vinita Kotedia in a note on the bond market.

Since the beginning of the year, the shilling has appreciated slightly against the dollar by 0.9 per cent.

Foreign currency reserves are currently at $7.33 billion (Sh744.5 billion) representing 4.69 months of import cover against the required four months, built up over the past three months partly due to the stable shilling that has removed the need for CBK intervention through dollar sales.

READ: Foreign currency reserves rebound to $7bn after January slide

The pressure on interest rates is also abating, with Treasury bill yields declining consistently since mid-January.

In last week’s auctions, the rate on the 91-day paper fell to 8.8 per cent, a 2.9 percentage point difference with the 2016 high of 11.7 per cent recorded in the third week of January.

For the 182- and 364-day Treasury bills, the prevailing rates are 10.9 and 12.2 per cent respectively. In January the two papers were offering interest rates at a high of 14.4 to 14.9 per cent.