MPC to Meet in Two Days: What Should Kenyans Expect?

The Monetary Policy Committee (MPC) is set to meet on 30th July 2018 to determine the course of the key policy rate, the Central Bank Rate (CBR).

The committee last met on May 28th, 2018 and maintained the CBR at 9.5 percent citing the policy action taken in March 2018 (a reduction of the CBR by 50bps, from 10.0%) was yet to have an impact on the economy.

Consequently, the MPC decided to adopt a wait-and-see approach. Despite the key macroeconomic indicators pointing towards monetary easing, economic analysts expect the MPC to maintain the CBR at 9.5 percent in the coming meeting as the interest rate caps pose a threat to growth.

Experts from Genghis Capital are of the view that the key macroeconomic variables point to easing monetary policy; stable currency, inflation within bound and low PSCG.

In a free market economy, an easing of monetary policy would serve to revive PSCG (and economic growth in general), with a view of making credit cheaper and hence more accessible.

However, given that the policy rate is tied to lending, a further cut could have an adverse impact on lending, as more borrowers will see themselves locked out of accessing credit due to subsequently reduced premiums attained by banks.

In the previous meeting, the committee noted it was still assessing the impact of its March policy action and it is highly unlikely that much has changed.

Analysts still expect PSCG to remain low (projected 2.00 – 4.00 percent in2H18) as more borrowers are locked out of accessing funding.

Despite this, the 5.70 percent GDP growth experienced in 1Q18 (with PSCG having grown by an average of 2.0 percent in the period) might give the committee confidence that the economy is back on track.

However, the growth can be mainly attributed to the low base effect in 1Q17, due to poor weather conditions proving detrimental to the agriculture sector, hence weighing down on economic growth.

Moreover, it can be argued that GDP growth would have come in much higher had PSCG been recorded close to the 5-year average of 13.5 percent.