Navigating Uncertainty: A Close Look At Kenya’s Financial Markets

This past week, the interbank market experienced a slight easing in liquidity constraints, reflected in a marginal decrease in the average lending rate, which dipped to 13.14% from the previous week’s 13.19%. Correspondingly, average traded volumes also saw a slight decline to KES 33.69 billion from KES 34.00 billion, aligned with a 3.7% drop in the number of interbank transactions.

Despite these shifts, the Central Bank of Kenya (CBK) remained proactive in managing market liquidity through open market operations. The CBK injected KES 120.61 billion into the market via 4-, 6-, 7-, and 14-day reverse repos, with an average rate of 13.78%. This injection was aimed at easing the lending environment, which saw a minor decline in rates following the recent downward adjustment of the Central Bank Rate (CBR).

In the realm of government securities, a significant rise in rates has been observed both month-to-date and year-to-date, with the exception of short-term instruments, which showed a slight decline on a monthly basis. The yield curve paints a picture of mixed investor sentiments, marked by an inverted shape that signals anticipated economic uncertainties in the near term. The most pronounced rate increases have occurred in medium-term securities, underscoring a cautious outlook among investors.

Meanwhile, in the foreign exchange market, the Kenyan shilling displayed resilience, maintaining strength against most major currencies, except for the Japanese Yen and the Euro. This stability has provided a buffer against imported inflationary pressures, helping to anchor the economy amidst global volatility.

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Market Insights

Private Sector Woes Amidst Political Turmoil: July PMI Reflects Economic Jitters

The private sector in Kenya faced a challenging July, as reflected in Stanbic Bank Kenya’s Purchasing Managers’ Index (PMI) survey. The index dropped to 43.1 from June’s 47.2, marking the steepest contraction in business activity in over three years. The economic strain was primarily due to nationwide protests, which heightened uncertainty and disrupted business operations, leading to precautionary spending behaviors that negatively impacted sales and overall output.

Business confidence has taken a significant hit, dropping to its second-lowest level on record, just above the all-time low observed in February. The private sector continues to grapple with costly credit and existing tax burdens, compounding the difficulties in an already strained economic environment.

MPC Cuts Central Bank Rate by 25 Basis Points to 12.75% Amid Positive Indicators

In a move that surprised many, the Monetary Policy Committee (MPC) of the Central Bank of Kenya decided to lower the Central Bank Rate (CBR) by 25 basis points to 12.75% during its meeting on August 6, 2024. This decision was driven by positive economic signals, including a drop in inflation rates below the mid-point target and a stable exchange rate against the US dollar. Additionally, global economic trends indicated that other economies are likely to follow suit in cutting rates, reinforcing the CBK’s decision.

The MPC noted that private sector credit growth has slowed significantly, decelerating to 4.0% in June 2024 from 4.5% in May and 12.2% in June 2023. This represents the slowest growth in over five years, influenced partly by exchange rate valuation effects on foreign currency-denominated loans following the appreciation of the shilling. However, there is optimism that the rate cut could spur a modest economic boost in the short term, particularly through increased capital expenditure and enhanced liquidity in the money market.

Despite these positive developments, concerns about Kenya’s fragile credit rating continue to weigh on market sentiment, contributing to heightened uncertainty. Nevertheless, the Kenyan shilling’s stability within its recent resistance levels suggests that inflationary pressures from imports remain under control for now.

The MPC is scheduled to meet again in October 2024 to reassess the economic landscape and make further policy adjustments as needed.

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