The recent reduction of the benchmark interest rate by the Monetary Policy Committee (MPC) marks the beginning of the easing cycle in the monetary policy stance, investment bankers at Citi Global Markets say.
The MPC, which is an independent body of the Central Bank of Kenya (CBK), cut the policy lending rate to 10.5 per cent from 11.5 per cent that has been in operation since last July.
The tightening cycle began in June last year when the shilling became volatile before its depreciation accelerated the following month as it became increasingly clear that the local currency was on a losing streak.
“With inflation already trending down to the mid-point of its target range of 5.0 per cent (plus or minus 2.5 percentage points), we expect that this is the start of a gradual cutting cycle in the second half of 2016, having passed through the hiking cycle in 2015,” said Citi in its latest report on African money markets.
Overall inflation in Kenya fell to 5.3 per cent in April, the lowest since June 2013. The price levels have been mostly within the target range of 2.5 to 7.5 per cent in the past few years, even when the shilling depreciated by 12 per cent last year.
The fall in the price level in April persuaded the MPC to cut the Central Bank Rate (CBR), interest rate cue, given that the shilling had also stabilised to about 100.2 units to the dollar.
The CBR is regarded as important to the markets as it used as the floor when the monetary authority lends to commercial banks and as the ceiling when the CBK mops from the money markets. The CBK uses reverse repurchasing agreements to inject liquidity into banks and repos in mopping up excess currency from the same institutions.
Citi analysts said that in Kenya inflation, though low, has been a concern for the low-income parts of the population which tend to be more affected by rising prices.
As a result of the disproportionate impact on the poor, central banks have to be concerned about how inflation affects specific segments of the population.
“Rising food price inflation also poses a specific problem for central banks in sub-Saharan Africa because food probably constitutes a bigger part of the basket that makes up the consumer price index than in other parts of the world. Because of this, it also has a bigger impact on low-income households, so rising food price inflation pushes up low-income household inflation more than for upper-income households. This is shown in the case of Kenya,” said Citi.