The Monetary Policy Committee (MPC) met on March 27, to review the outcome of its previous policy decisions where it decided to retain the Central Bank’s base lending rate at 9.00 percent.
The committee underscored how interest rate caps severely constrain the formulation, conduct, and effectiveness of monetary policy.
MPC noted that these interest rate caps have hampered access to credit by growth sectors, particularly MSMEs.
Nevertheless, in the review, it was indicated that inflation expectations remained well anchored within the target range and that the economy was operating close to its potential.
According to MPC, besides the gradual rise in international oil prices and the weakening of global growth, the overall inflation fell to 4.1 percent in February from 4.7 percent in January
The month-on-month overall inflation remained within the target range in January and February despite the challenges including the domestic macroeconomic stability, sustained optimism on the economic growth prospects and the delayed onset of the long rains in parts of the country.
Stable food prices, lower electricity and fuel prices, and muted demand-driven inflationary pressures backed the declining trend.
Non-food-non-fuel (NFNF) inflation remained below 5 percent, indicating that demand pressures in the economy were muted.
According to MPC, the rise of international oil prices may exert moderate upward pressure on prices of fuel.
“However, overall inflation is expected to remain within the target range in the near term, in part due to the adequacy of food supplies and lower electricity prices with the reduced usage of expensive power sources,” read MPC’s statement.
MPC also commented on the foreign exchange market, which has remained stable due to support from the narrowing of the current account deficit to 4.7 percent of GDP in the 12 months to February from 5.5 percent in February 2018.
Additionally, growth in imports slowed mainly due to lower imports of food and machinery. The current account deficit is expected to narrow to 4.8 percent of GDP in 2019 from an estimated 4.9 percent in 2018.
The CBK foreign exchange reserves, which currently stand at 8,251 million US dollars, continue to provide adequate cover and a buffer against short-term shocks in the foreign exchange market.
Private sector credit grew by 3.4 percent in the 12 months to February, compared to 3.0 percent in January.
Strong growth in private sector credit was observed in finance and insurance (13.1 percent); consumer durables (16.2 percent); manufacturing (7.7 percent); and trade (6.4 percent).
Private sector credit growth is expected to strengthen in 2019, with the anticipated higher economic activity and improved lending to the Micro Small and Medium Enterprises (MSMEs).
The banking sector, on the other hand, remains stable and resilient. Average commercial banks’ liquidity and capital adequacy ratios stood at 49.8 percent and 18.1 percent, respectively, in February.
The ratio of gross non-performing loans (NPLs) to gross loans stood at 12.8 percent in February compared to 12.0 percent in December 2018, reflecting increases in NPLs mainly in the trade, real estate, and transport and communications sectors.
“This reflected delayed payments by both public and private sector entities, and slow uptake of housing units. However, banks continue with mitigation measures to address the increase in NPLs, including recovery efforts,” read part of the MPC statement.
Despite great expectations of strong economic growth in 2019, MPC said that the hopes have been tempered by delayed onset of the long rains in most parts of the country, and slow growth in private sector credit particularly to MSMEs.
The committee also claims that global growth is showing signs of weakening in 2019.
“This is weighed down by trade tensions between the U.S. and China, the slower growth of the Chinese economy, uncertainties over the nature and timing of Brexit, and the pace of normalization of monetary policy in the advanced economies,” said MPC.
These developments have resulted in increased volatility in the global financial markets.