Increased CBR could mean slowdown in economic growth in Kenya

Anticipated slowdown in economic growth in Kenya

Treasury bills continued to be undersubscribed with a 48% overall subscription this week after a 45% subscription last week with most investors preferring the 91-day T-bill, which saw Kshs 2.45 billion subscription versus Kshs 1 billion on offer.

The trend on T-bill yields was mixed as the 91-day and the 182-day saw an increase to 8.3% and 11.1% from 8.2% and 10.8%, respectively, while the 182-day was unchanged at 10.5%. The interbank rate corrected during the week to 10.2% from 13.6% the previous week as the market liquidity improved slightly.

In a bid to curb the shilling weakness, the Monetary Policy Committee brought their bi-monthly meeting earlier by one month and in the meeting raised the Central Bank Rate (CBR) to 10% from 8.5%. In our view the rate increase should have come in a bit earlier, in April, in which case they wouldn’t have needed to raise by 150 bps; a 25 bps raise in April would have been sufficient message to the marker that CBK is willing to defend the shilling.

This would have discouraged any borrowing for exports or further speculation on the shilling. The delayed action then forced the MPC to meet earlier than usual and the magnitude of the rate increase was higher than the market expected. This might lead to a slowdown in economic growth due to reduced credit to the private sector.

The market reacted negatively to the rate increase with the shilling depreciating by 1.1% during the week to close at 97.2 against the dollar. The fundamentals of the shilling remain weak among them being: widening current account deficit estimated at 9% of GDP for the FY2015/2016, increasing fiscal deficit at 5% of GDP and the reduced inflows from tourism and other foreign exchange earners. The key factors supporting the currency are low inflation rates and the high forex reserves held by Central Bank, but this has been depleted slightly over the last few weeks.

Following the increase in the Central Bank Rate (CBR), we expect the yields on government securities to increase and this will negatively impact the valuation of Mark-to-Market bond portfolios. We hold our earlier recommendation that investors should invest in short duration fixed income instruments.

The original article was made by Cytonn Investments Research Team

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