Market News

CBK seen easing policy rate in bid to stimulate economy

cbk

The Central Bank of Kenya offices in Nairobi. FILE PHOTO | NMG

Stable inflation and a need to stimulate the economy are likely to push the Central Bank to ease monetary policy further towards the end of the year, analysts at NCBA have said, with a possible rate cut by December should the economy suffer any more Covid related shocks.

In their latest economic output report for June, NCBA said CBK is likely to hold the base rate at seven percent well into the last quarter of the year, but project a cut to 6.75 percent in December.

Due to the limitations in the country’s fiscal policy, partly due to a large deficit, there is more pressure on the monetary side to help stimulate the economy, especially in trying to grow credit to the private sector.

CBK has retained the base rate at seven percent since March last year, supported by stable inflation that has remained within range, and an improvement in the output gap, which measures the difference between the actual output of the economy and its potential output.

“We expect the central bank to hold the policy rate at the current rate of seven percent with an easing bias in the latter half of 2021,” said the NCBA analysts.

“Positive output gap, the quality notwithstanding, coupled with limited risks to inflation outlook may support this stance. However, fresh shocks from the pandemic could necessitate further easing.”

The analyst however pointed at the relatively weak transmission of monetary policy to private sector credit growth, which at 6.8 percent in April remains lower than the ideal level of 12-15 percent that is required to fuel healthy economic growth.

This has largely been attributed to the heightened risk aversion by banks, which have seen their levels of non-performing loans shoot up due to a tough economic environment.

“Normalisation of these loans will be subject to recovery in business activities that may drag beyond 2021. As such, the need for further support to avoid systemic pressure on bank balance sheets cannot be gainsaid,” said the analysts.