The Monetary Policy Committee (MPC) is set to meet on Thursday, 25^th June 2020, to review the outcome of its previous policy decisions and recent economic developments, and to make a decision on the direction of the Central Bank Rate (CBR). In their previous meeting held on 27^th May 2020, the committee decided to reconvene within a month for an early assessment of the impact of these measures and the evolution of the COVID-19 pandemic. In the last sitting, the MPC maintained the CBR at 7.00% citing that the accommodative policy stance adopted in March and April 2020 sittings, which saw a cumulative 125bps cut, was having the intended effects on the economy. This was in line with our expectations as per our MPC Note with our view having being informed by:

1. Inflation stability, with the inflation rate having remained within the government’s target range of 2.5% - 7.5%, despite the increased liquidity in the money markets mainly attributable to the lowering of the Cash Reserve Ratio (CRR) to 4.25%, from 5.25% in the March 2020 meeting. Inflation stability has been witnessed by many economies globally as business and social activities come to a near standstill due to the Coronavirus pandemic. This has seen demand for goods decline as governments impose strict lockdown measures to control the spread of the virus.
2. We foresaw the MPC taking a wait and see approach as it observed the effects of the 25 bps rate cut seen in the April 2020 sitting. Despite the need for economic stimulus in the wake of the Coronavirus that has adversely effected the economic growth, we believed that additional policy rate cuts might be ineffective and may not translate to increased private sector credit growth or lower lending rates, on account of the bank’s credit pricing models during this period of economic uncertainties, with the expectations of increased levels of Non-performing loans, and,
3. By further implementing an accommodative policy stance, domestic investment activities would decline as Kenya’s financial and capital assets become less appealing to investors on account of their lower real rate of return.

The Monetary Policy also noted that the current account deficit was projected to remain stable at 5.8% of GDP in 2020, from the previously recorded deficits of 5.0% and 4.3% of GDP in 2018 and 2019 respectively,  supported by lower oil imports that would offset the projected reduction in remittances and exports.

Below, we analyze the trends of the macro-economic indicators since the May 2020 MPC meeting, and how they are likely to affect the MPC decision on the direction of the CBR:

Conclusion

Of the six factors that we track, three are negative, two are neutral, and one is positive, with one change in our inflation projections from neutral to positive, between May 2020 and June 2020. Central Banks around the world have adopted a wait and see approach by maintaining the Central Bank Rate at the previous levels citing that the accommodative policy stance was helping their economies. The table below shows how Central Banks of major global economies that have moved to maintain their interest rates so far:

The main goal of the monetary policy is to maintain price stability and support economic growth by controlling money supply in the economy.  We expect the MPC to maintain the Central Bank Rate (CBR) at 7.00%, with their decision mainly being supported by:

1. Inflation is expected to remain stable and within the government’s target range of 2.5% -7.5% on account of the reopening of the Global markets which will address supply chain issues causing import prices to stabilize coupled with depressed global oil prices. Given that one of the main goals of monetary policy is to ensure price stability, we believe that the stable inflation rate will not exert pressure on the MPC to implement inflationary control,
2. The recent economic stimulus package unveiled by the President is expected to stimulate economic activities amid the COVID-19 pandemic. The post COVID-19 economic stimulus package will provide credit guarantee loans to Micro, Small and Medium Enterprises (MSMEs) as well as promote tourism, which has been hit hard by the pandemic. The government has set aside Kshs 56.6 bn to cater for the program. The stimulus package is set to take effect on 1^st July 2020 and as such, we believe that these will help in the mitigation against the adverse impacts of the pandemic and will further reposition the economy towards a recovery in a sustainable and steady trajectory. The credit facilities by the World Bank of USD 1.0 bn (Kshs 106.5 bn) and the USD 739.0 mn (Kshs 78.7 bn) from the International Monetary Fund (IMF) will go a long way in supporting the government’s efforts of economic recovery. We believe that this will reduce pressure on the MPC to pursue additional policy measures, and,
3. The MPC will not come under pressure to cut the policy rates given that additional rate cuts will not translate to increased private sector growth. Should the MPC pursue additional rate cuts, Kenya’s financial and capital assets will become less appealing to investors on account of the lower rate of return. Consequently, the shilling will continue to depreciate on the back of increased dollar demand. As such, we believe the MPC will maintain the CBR at 7.00%

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