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Experts divided on policy rate direction

Razia Khan
Razia Khan, chief economist for Africa at Standard Chartered. FILE PHOTO | NMG 

Analysts are divided over the likelihood of the central bank’s rate-setting Monetary Policy Committee (MPC) keeping the benchmark number at nine per cent at its meeting scheduled for Tuesday.

During the last sitting on July 30 the MPC, which meets every two months, cut the benchmark lending rate by 0.5 percentage point, signalling a drop in the cost of loans by a similar margin.

Two of the four analysts polled tipped the Central Bank of Kenya (CBK) to keep the key rate at 9 per cent while the rest expect a cut of about 50 per cent.

Those who are looking at a retention noted several uncertainties, including the troubled transmission of monetary policy in the current environment as well as potential external challenges.

“We expect the CBK to hold interest rates given a number of uncertainties, including the transmission of monetary policy in the current environment (loan rate cap in place, but the deposit floor has gone) and external uncertainties – a selloff in key emerging markets that could yet threaten inflows into frontier and emerging economies more significantly,” said Razia Khan, chief economist for Africa at Standard Chartered.


Ms Khan also noted the rise in the oil price will also be a concern for the CBK.

Her sentiments were echoed by Nairobi-based independent analyst and CEO of Rich Management, Aly-Khan Satchu.

“The biggest single challenge for the MPC is that the rate cap has interfered with monetary policy-making transmission. Clearly VAT is set to bump inflation and now that we have ''stop-lossed'' the IMF, the shilling will need more support,” said Mr Satchu.

“Moreover, the trend in emerging and frontier markets is for higher interest rates in order to push back at a stronger dollar. Therefore, when I take all these into consideration, I see no real purpose behind a rate cut other than one of signalling.”

But according Deepak Dave, the founder of Riverside Capital Advisory, the MPC is likely to vote for a 50 basis points cut.

“In present circumstances the liquidity premium has narrowed given tenor restrictions, and in such cases one expects the Central Bank Rate should be altered to reduce the premium and rebalance the yield curve,” said Mr Dave.

In a pre-MPC note Commercial Bank of Africa (CBA) said: “While the conduct of monetary policy may be complicated by the current uncertainty on the fiscal side, the current low level of inflation at 4.04 per cent, relative currency stability and potential for sustained negative output gap with the aforementioned austerity could be ground for further accommodation.”