Analysts expect CBK to hold benchmark interest rate on Monday

The Central Bank of Kenya’s Monetary Policy Committee (MPC)  meets on Monday (today) to review the prevailing macro-economic conditions and give direction on the Central Bank Rate (CBR).

According to two Kenyan  Investments firms, the MPC will keep its Central Bank Rate (CBR) at 10 per cent.

“The Money supply growth is high, at 22.1 percent as at March, and the trend could be inflationary and there are heavy maturities of government securities leading to more liquidity in the market.”

“MPC should adopt a tightening monetary policy decision,” the say. “However, looking at the trend in private sector credit growth, which is now at an 8-year low, and the slowdown in GDP growth, we expect that the MPC will hold the CBR at 10.0 percent, in order to support economic growth,” said Cytonn Investments, in a note on Thursday.

Also on Monday, Genghis Capital Analysts said, “With the interest law intact in its current form, we do not envision any rate adjustments from the MPC meeting.”

“However, we note that the interest rate regime has crippled the CBK to a rock-and-hard-place as a possible easing will further trim the current 700bps spread, denting fatal blows to an already limping banking industry,” they add.

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Both firms state that Monday’s meeting is being held against the backdrop that economic indicators have pointed to a growth slowdown.

First, headline inflation is perched above the upper limit target largely driven by the flare up in food inflation. This has led to the policy focus directed on the core inflation which has steadied below 5.00 percent y/y attributed to the subdued demand pressure; which has been reflected in the muted sub-5 percent core inflation growth level since June 2016 and confirmed by the leading PMI indicator which has pointed to a slack in private sector output.

Secondly, latest statistics indicate private sector lending at a low of 3.30 percent. “Although the decline kicked in 2Q15 due to structural weakness in the banking sector, the interest rate law has exacerbated the trend as banking players play safe with increased lending to government,” says Genghis Capital.

Cytonn Investments justify their stance due to key indicators: Budget Deficit (neutral), Inflation (Negative to neutral), Currency -USD/Kshs(neutral), Private Sector Credit Growth (neutral to negative), and Liquidity (neutral to negative), “two have worsened from neutral to negative, two have remained neutral, while one has turned neutral from negative”.

According to Cytonn, “For the stable economic environment to persist, the monetary and fiscal policies put in place should be geared towards price stability and revamping the private sector, which is a key driver for economic growth in any developing economy. The government should come up with policy framework aimed at providing a conducive environment for private sector to operate, thereby creating more jobs, improving the standards of living and hence spurring economic growth.”

In their previous meeting held in May 2017, the MPC maintained the CBR at 10.0 percent on account of the foreign exchange market, which remained relatively stable, supported by a narrower current account deficit and high forex reserves, and the banking sector remaining resilient, with the average commercial banks liquidity ratio and capital adequacy ratio at 44.4 percent and 18.8 percent, respectively, while the gross NPL ratio for the sector declined slightly to 9.6 percent in April from 9.7 percent recorded in February.

If maintained as per the expectations, it will be the sixth consecutive time  since July 25, 2016, when the bank’s lending rate was lowered from 10.5 per cent.