The Central Bank of Kenya (CBK) has been tipped to retain a cautious monetary policy stance even as falling inflation, a stronger shilling and low interest rates present conditions conducive to monetary easing.
Analysts at Commercial Bank of Africa (CBA) say in its monthly economic report for February that the prevailing low growth in private sector credit, partly attributed to the rate cap on loans, will moderate any urge by the regulator to cut the benchmark rate.
Favourable weather has cut the price of food, helping keep inflation within the CBK preferred range of 2.5 to 7.5 percent. Lower oil prices have also helped ease the cost of living, with pump prices coming down by between Sh13.50 (petrol) and Sh16.50 (diesel) a litre in the past two months.
“Inflation will trend lower driven by stable and low food and fuel prices as well as subdued demand pressure. In February, we expect price changes to drop below 4.5 percent,” said CBA.
“This could see the monetary policy bend towards easing especially if the narrowing output gap proves non-inflationary. Even then, the Central Bank will remain cautious of pervasive effects of the interest rate cap.”
In the last Monetary Policy Committee (MPC) meeting held at the end of January, the CBK held the base rate at nine percent, describing its current policy stance as “appropriate” as it continues to monitor any perverse response to its previous decisions.
Analysts at Sterling Capital expect that the MPC will adopt the same stance in the March meeting, citing the fact that the CBK has been reluctant to move the bar when macroeconomic conditions are stable.
The use of the base rate to price private sector loans has not been without critics, however, with the International Monetary Fund (IMF) saying in the past that this has had the effect of diluting the transmission of monetary policy measures in Kenya.
The law, experts argue, has effectively placed the regulator in a difficult position where conditions are calling for a rate cut to spur private sector borrowing, which will help grow the economy.
On the other hand, banks have shown an unwillingness to lend to customers without being able to price in risk, thus negating any positive effect that a rate cut would have on loan growth.