Analysts split on best monetary policy direction as CBK meets

Analysts are divided on the best option that the Central Bank of Kenya (CBK) policy-making organ should take during Monday’s meeting amid relatively low inflation rate and unpredictable growth prospects.

However, they are in agreement that there should be no increase in the benchmark rate which influences amongst others the cost of commercial loans.

Bloomberg Intelligence predicts a modest policy rate cut of up to 50 basis points (bps) while analysts at Cytonn Investment say it ought to be maintained at 11.5 per cent.

“The main reason to expect a rate cut is that annual inflation dropped to a three-year low of 5.3 per cent in April, a stable fall through 6.4 per cent in March and eight per cent in December,” says Bloomberg Intelligence economist Mark Bohlund.

“The CBK is likely to cut rates more gradually than during its most recent easing cycle in 2012-13, reflecting robust economic momentum and concerns about increased spending by county-level governments ahead of the 2017 elections.”

Should the CBK’s Monetary Policy Committee (MPC) take that direction, today could mark the beginning off efforts to roll back the 300bps of tightening which it introduced in June and July last year to protect the shilling—which has been stable relative to African currencies—raising the rate to 11.50 per cent.

The MPC sets its signal rate after reviewing the prevailing macro-economic environment and also formulates appropriate policies to maintain stability.

During its March meeting, it opted to retain the rate at 11.5 per cent citing marginal drop in inflation, stability in foreign exchange rates and improved foreign exchange reserves, which have since hit 5.1 month cover for the first time since December 2014.

READ: Central bank leaves policy rate steady bucking prediction

Mr Bohlund says improved rains across the country will keep food prices down, easing pressure on most households in the months to come.

He however acknowledges that revised excise duties are likely to raise retail prices from July, offsetting the disinflationary impact from food prices. With oil prices on the rise again, it looks likely any drop in inflation below five per cent will be temporary.

Analysts at Cytonn cite these possible spikes in prices as ground for caution. They see an upward pressure on inflation in the coming months and spillover effects of a likely interest rate rise by the US Fed that will in effect strengthen the dollar thus exerting a downward pressure on the value of the shilling.

Another ground for caution, the analysts say, is possible additional local and external borrowing that will increase pressure on local rate environment and increase dollar obligations from the interest repayments, digging into the forex reserves.

“In our view, the MPC will maintain Central Bank Rate at the current rate for the best interest of the country’s economic stability,” Cyntonn Investment says in its May 19 update.

Mr Bohlund however says an uptick in non-performing loans could make banks reluctant to reduce interest rates in tandem with inflation even if the CBK cues rates downward.

CBK Governor Patrick Njoroge has previously signalled his preference for cuts in public expenditure rather than for monetary easing.