External factors may pile pressure on the Central Bank team to review its latest decision on charges.
Last week, the Monetary Policy Committee (MPC) delivered its first interest rate cut since July 2016—the Central Bank Rate (CBR) was lowered by 50 basis points to 9.5 per cent.
The decision showed more confidence in the strength of the economy. And signs that the move was well received, the markets gave a nice little nod: NASI, NSE 20 and NSE 25 rose 4.4 per cent, 1.2 per cent and 3.9 per cent, respectively.
Possibly, should conditions continue to improve, it’s highly probable that policymakers may continue down the easing path. However, investors need not be moved by the optimistic language. MPC has a history of being very reactive (recall 2011). A measured focus on the finer details is necessary. Let’s look at a few pointers.
One, MPC appears not worried about surge of inflation (at least for now). The monetary policy body expects overall inflation to remain within the government target range in the near term mainly due to expectations of contained food prices following improved weather conditions.
But make no mistake, as global growth gathers steam, fuel price volatility has also been on the rise. In February, prices averaged $65 a barrel.
That’s after briefly hitting $70/b in January. If prices climb north of $90, this may stoke up inflation locally; a dangerous scenario that may reverse the underlying dovish stance.
A key factor to potentially bring this forth involves the decision by the Organisation of Petroleum Exporting Countries to keep production cuts through 2018.
Two, undoubtedly business confidence is coming back. The MPC Private Sector Market Perception Survey (March 2018) shows stronger growth expectations from the business community.
Improving business conditions, growing political stability and favourable weather conditions are some of the factors underlining this optimism.
Recent PMI readings reinforce this view. But this confidence faces a mighty headwind; slowing private credit growth—private sector credit grew by 2.1 per cent in the 12 months to February 2018 (slightly lower than 2.4 per cent in December 2017)—a fact captured in the MPC statement.
Rising non-performing loans further compounds this issue—ratio of gross NPLs to gross loans increased to 11.4 per cent in February 2018 from 10.6 per cent in December 2017. Prolonged stay of the status quo may result in poor results (read dwindling capex, muted expansion, and so on).
Three. Although the shilling appreciated (0.3 per cent against the dollar) to 100, this trend may be near-term unsustainable. Fed Reserve officials, meeting for the first time under the new chairman, Jerome Powell, raised the benchmark lending rate ranging 1.5 per cent to 1.75 per cent. US Fed monetary tightening could trigger an avalanche of capital outflows from emerging assets as the dollar firms up.
An aggressive Fed is an unstoppable force for a Sh870 billion war chest (CBK total currency reserves) and perhaps too inadequate for the recently negotiated International Monetary Fund facility.
If this scenario pans out—already policymakers project a total of three increases this year—markets may go sideways and yields may tumble as a result. In short, in this environment a certain amount of caution is necessary and healthy.
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