Economists at NCBA say weak demand has removed pressure on inflation but the high liquidity is likely to factor in the monetary policy decision.
The high liquidity in the local money market is likely to push the Central Bank of Kenya (CBK) to retain the base lending rate at seven percent, analysts say.
The Monetary Policy Committee of the CBK meets Thursday to take stock of the developments in the pandemic-hit economy since the meeting on May 27 and chart a way forward, against the backdrop of stable inflation and exchange rate.
Economists at lender NCBA #ticker:NCBA say weak demand has removed pressure on inflation but the high liquidity is likely to factor in the monetary policy decision.
“On the monetary front, the Central Bank may keep rates on hold, as it struggles with excess liquidity for now. This is despite well-anchored inflation expectations thanks to lethargic credit-market induced demand slack,” said NCBA in the June monthly economic report.
Normally, high liquidity in the market would see a push for some tightening, either in the base rate or raising the cash reserve ratio for banks.
The CBK, however, lowered the ratio from 5.25 percent to 4.25 percent in March to allow banks to support borrowers who are negatively affected by the Covid-19 outbreak.
At the end of last week, commercial banks excess reserves above the CRR requirement stood at Sh39.1 billion, having gone up from Sh32.8 billion the previous week.
The high liquidity market was also seen in the government securities auctions, with the Sh40 billion, five- and 10-year bond auction attracting Sh105.1 billion worth of bids, while the Sh24 billion Treasury bill auction cumulatively attracted Sh45.2 billion worth of bids for the three tenors.
On the other hand, central banks ease their policy rate to increase liquidity, which helps to spur growth by creating demand in the economy.
The CBK cut its base lending rate in four successive meetings between September 2019 and April in a bid to spur lending to the private sector, having seen the economy’s growth slow down.
In its meeting last month, the MPC said real GDP growth in 2020 could slow to about 2.3 percent from 5.4 percent in 2019 due to the Covid pandemic, while inflation is expected to remain within the target range of five percent plus or minus 2.5 percentage points in the near term.
Private sector credit grew by nine per cent in the 12 months to April 2020, compared to 8.9 per cent in March and 7.7 per cent in February.
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