Central Bank tipped to cut policy rate, again

The Central Bank of Kenya (CBK) is likely to cut the base rate once again by at least 25 basis points, according to economists, who point out the need to establish a base for the economic rebound in the post-Covid-19 period.

In last month’s meeting, the Monetary Policy Committee (MPC) made a 25-basis point cut in the base rate, to seven percent from 7.5 percent, which marked the fourth straight cut in the rate by the CBK going back to November 2019 meeting.

The accommodative policy stance has been informed by the adverse economic conditions both in Kenya and across the globe due to the Covid-19 pandemic.

Analysts at investment bank KCB Capital said the two most recent cuts (100bps cut in March followed by 25bps cut in April), should trickle down to the economy, but to a greater extent only once the healthcare crisis abates.

The analysts, therefore, anticipate a further cut Wednesday, despite headline inflation remaining within preferred range at 5.6 percent, due to low fuel prices.

“We expect the two rate cut decisions, in addition to any anticipated cut, will primarily serve to establish a low base rate for economic recovery once business normalcy resumes and the operating environment begins to improve,” said KCB Capital in the MPC outlook note.

“We anticipate the MPC will cut the benchmark rate by a further 25bps to 6.75 percent in the May meeting, monitoring the impact of the Covid-19 pandemic, to convene again in a month.”

inflationary pressure

Economists at NCBA see the regulator cutting the base rate by additional 100-basis points this year, despite expectations of limited inflationary pressure.

“Weak demand coupled with low fuel prices should offset pressure from potential food supply shocks, keeping inflation within the statutory target band. That said, we think that the Central Bank will reduce the policy rate by an additional 100bps this year,” said NCBA in its May monthly economic report.