Cut in CBK benchmark rate ahead of 2017 polls unlikely, say analysts

Standard Gauge Railway workers construct an overpass. The project is among those likely to attract public spending as the government rushes to complete it. PHOTO | FILE

What you need to know:

  • The election period normally sees accelerated spending as the government races to complete projects to make a better pitch to voters.

Chances of a further Central Bank Rate (CBR) cut and consequently fall in cost of bank loans will recede in the second half of the year as next year’s general election looms and effects of the recent tax increases start to impact inflation.

Analysts at Stratlink Africa say the election period normally sees accelerated spending as the government races to complete projects to make a better pitch to voters, which in turn raises pressure on borrowing and interest rates.

The price of oil has also shown signs of recovery in international markets, which could push inflation upwards with the shilling likely to come under pressure in the wake of Britain’s vote to leave the European Union, commonly known as the ‘Brexit’ a move that could strengthen the dollar in the long term.

“With minimal room for fiscal expansion, focus on nudging the macroeconomic environment forward is bound to shift to monetary policy with a remote likelihood of a further slash of the benchmark rate between quarters three and four of 2016 as the country races to the 2017 general election cycle,” says Stratlink.

“The likelihood is remote given that a raft of measures proposed in Budget 2016/17, including an introduction of excise duty and (tax on) beauty products, are likely to see inflation trend upwards in late 2016.”

Analysts have been offering contrasting outlooks on the possibility of a further rate cut this year, indicating a level of uncertainty on the subject in financial circles.

Central Bank of Kenya’s (CBK) Monetary Policy Committee made a 100 basis point cut on the CBR during its last meeting in May, which left the benchmark rate at 10.5 per cent.

In an analysis note issued on June 27, economists at Citi said that though Kenya is likely to experience modest inflationary pressure in the second half of the year, the CBK still has further room to ease monetary policy.

Citi noted that inflation in East Africa has fallen faster than anticipated in the first half of the year, and the rate of depreciation of currencies has also slowed down compared to the second half of 2015 allowing for a softer stance by regulators.

“While inflation in the region is likely to pick up from the current low levels in the second half, we do not expect the pick-up to be significant. This means that there is still potential for a further gradual easing of monetary policy,” said Citi in the note.

The CBK mainly prescribes inflation in its monetary policy stance, with its preferred target range being five per cent plus or minus 250 basis points.

Food and transport costs are expected to provide the highest point of inflationary pressure going forward, with the two items already having caused inflation for June to rise to 5.8 per cent from five per cent in May.

Bloomberg Intelligence Africa and Middle East economist Mark Bohlund also says in a market insight note that the CBK is likely to effect a further cut of between 50 and 100 basis points in the second half of the year (though not in its July meeting).

This is in spite of strong gross domestic product growth of 5.9 per cent in quarter one 2016 and uptick in inflation.

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