MPC Meets On Monday: This Is What You Should Expect

The CBK Monetary Policy Committee (MPC) is set to meet on Monday 23^rd September 2019 to determine the course of the key policy rate, the Central Bank Rate (CBR).

The committee last met on July 24^th, 2019 and maintained the CBR at 9.0 percent citing a stable macroeconomic environment (inflation within the government target range and a steady foreign exchange market).

Further, the committee noted that the economy was operating close to full potential but remained cautious on the domestic demonetization process and uncertainty in the global market.

“We expect the MPC to adopt a neutral policy stance and maintain the benchmark rate at 9.0 percent in their September meeting,” said analysts from Genghis Capital.

According to Genghis Capital, MPC will retain the rate at 9.0 percent because of

• Stable inflation
• Steady currency, albeit under pressure,
• Continued uncertainty in growth expectations both locally and globally

Expectations

Near-term inflation to be contained within target levels

The overall print reported since the last MPC meeting has been relatively stable, closing at 5.0 percent in August 2019, with food prices contained in the two review months.

On the global front, oil prices witnessed a surge this Monday, following drone attacks on two Saudi Arabian oil plants, reportedly cutting down circa 6.0 percent of the global oil supply.

Despite this, the Saudi government has indicated that production is expected to be normalized by the end of September, allaying fears of a shortage and subduing global oil prices.

Additionally, the slowdown in global growth this year is expected to suppress demand. Overall, we expect inflation to oscillate within the government target range, with food and fuel pressures constrained.

Shilling to withstand pressure and remain steady against the dollar

The shillings has been under pressure over the last couple of months, attributed primarily to the heightened liquidity in the market, with the Central Bank quite active in the repo market over the same period.

Forex reserves have declined by USD 0.5 billion to USD 9.2 billion (5.75 months of import cover) since the July MPC meeting primarily attributed to Eurobond interest payments at the end of August, coupled with the potential end of July interest obligations on syndicated and other loans, which we estimate at USD 0.3 billion.

Stripping out interest payments, forex reserves appear relatively stable in the 2 months prior to the July meeting, though we note gradual deterioration in the core reserves (FX reserves less impact of interest & principal payments) since the start of August on the back of a depreciating currency, heading into the September meeting.

Despite this, the forex reserves present an adequate cushion for the local unit in the short term and have been relatively sturdy as highlighted by the normalized reserves. Additionally, bearish policy sentiments by The US Fed should soften pressure on KES.