Eyes on the shilling as MPC meets next week

The recent weakening of the shilling is expected to be the main focus of the Monetary Policy Committee (MPC) next week, given that inflation has remained contained within the preferred range in spite of tax rise.

The central bank’s MPC meets Tuesday, also against the backdrop of continued slow growth of private sector credit and a relatively stable macroeconomic environment where growth has improved compared to last year.

Analysts at Commercial Bank of Africa and Kingdom Securities therefore expect the MPC will leave the base rate unchanged at nine per cent, largely to wait and see the developments in inflation and the exchange rate.

Since the last meeting on September 25, the shilling’s exchange rate against the dollar has moved from 100.85 units to 102.35, having touched a low of 103.20 along the way on November 16.

“The currency will remain a focal point for the MPC at the next meeting given its impact on inflation and inflation expectations,” said the CBA analysis.

“The response from MPC is likely to be cautionary, perhaps a little more hawkish. Given that underlying inflation fundamentals remain somewhat stable with the lethargy in the credit market likely to persist, the regulator is this month likely to remain neutral on its policy stance but indicate its willingness to act should risks to inflation especially from the currency depreciation remain.”

Kingdom analysts say that while they expect there will be some upward inflationary pressure arising out of the tax on petroleum products, it would remain within the preferred target range of 2.5 to 7.5 per cent.

Inflation in October fell to 5.53 per cent from 5.7 per cent of September.

“On the back of the stability present in the macro-economic environment, we portend the MPC to leave the CBR unchanged at nine per cent during the next meeting,” said Kingdom Securities.