Analysts differ on Central Bank action ahead of meeting

The shilling slipped against the dollar on Tuesday as analysts offered differing predictions of the likely Monetary Policy Committee (MPC) action expected from today’s meeting.

Razia Khan, the head of research for Africa at Standard Chartered Bank, said there was no need for the Central Bank of Kenya (CBK) to raise interest rates further.

CBK has increased the benchmark policy rate by 11 percentage points in three consecutive sittings, as it struggled to tame inflation and stabilise a rapidly weakening shilling.

“We expect CBK to maintain the central bank rate at 18 per cent, having tightened by an unexpectedly large (1.5 percentage points) at its last meeting,” said Ms Khan.

The inflation rate appears to have peaked at 19.72 per cent in November having dropped to 18.93 per cent last month, while the shilling has strengthened from an all-time low of 107 units to the dollar in October to the current late eighty levels.

“Although single-digit inflation may not be seen (on current projections) until the fourth quarter of this year, the Central Bank should be in a position to start easing monetary policy as early as June.

We expect at least four percentage points of rate cuts this year,” said Ms Khan.

Other analysts, however, foresaw a possible rate hike. “We are of the view that, given the recent weakening of the shilling, the MPC, though marginally, may further tighten the monetary stance in an effort to stabilise the shilling.

Though inflation is slowing down, a weak shilling may sustain the inflationary pressures through increased exposure, considering the country’s net import position,” said analysts at Sterling Capital.

Old Mutual researchers also expressed a similar opinion.

“We expect the MPC to tighten liquidity further and increase the CBR albeit at a slower rate than the previous increases.”

Yesterday CBK sold an undisclosed value of dollars to support the local currency that was approaching 88 to the dollar in the early morning trade.

Commercial banks quoted the shilling at 87.75 against the dollar yesterday from 86.95 on Monday driven by high demand for the US currency from oil importers.

Traders said fundamentals are for a weaker shilling, but interventions by the regulator was the only factor holding the currency from dropping further.

“We don’t know how far the CBK can continue to intervene by selling dollars but current demand is higher than supply,” said Mr Bernard Omenda, a dealer with KCB.

The Central Bank has been in the market selling dollars and mopping up shilling liquidity in the past few days to give support to the shilling.

The CBK has so far mopped up more than Sh11 billion ($134 million) from the market since the beginning of this year, Reuters reported yesterday.

The sliding euro against the greenback is also seen as another source of pressure on the shilling going forward.

The head of trading at the Cooperative Bank Solomon Alubala said oil prices are still high on the world market and that the shilling will continue to track global oil prices.

The CBK raised policy lending rate by four percentage points in October, 5.5 percentage points in November and 1.5 percentage points in December.

The gap between imports and exports of goods and services, known as the current account deficit, now stands at above 10 percent of GDP, which the World Bank said is among the key risks facing the shilling.

“Today, Kenya’s four main exports do not even earn enough to pay for its oil imports, not to mention other imports,” the Bank said in its December report.