MPC Note September 2021

By Research Team, May 21, 2022

Cytonn Note on the 28th September 2021 Monetary Policy Committee (MPC) Meeting

The Monetary Policy Committee (MPC) is set to meet on Tuesday, 28th September 2021, to review the outcome of its previous policy decisions and recent economic developments, and to decide on the direction of the Central Bank Rate (CBR). In their previous meeting held on 28th July 2021, the committee decided to reconvene on September 2021, highlighting that they would remain ready to reconvene earlier if necessary, as they continue to closely monitor the impact of the policy measures. Additionally, the MPC maintained the CBR at 7.00%, citing that the accommodative policy stance adopted in March 2020, and all the other sittings since, which saw a cumulative 125 bps 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 2.5%-7.5% target range despite the increases in fuel prices. Notably, June’s inflation rate was at 6.3%, a 16 month high and above the midpoint of the government’s target. We also noted that the IMF had raised a concern on the country’s rising inflation rates. Therefore, we believed that the MPC would be under pressure in the short term to maintain price stability should the inflation rates continue rising,
  2. High domestic maturities, which stood at Kshs 770.0 bn as at 16th July 2021. The government had to borrow Kshs 52.9 bn monthly to meet its domestic borrowing target of Kshs 658.5 bn in the 2021/2022 fiscal year and as such, we expected the government to maintain the current rates so as to continue accessing domestic debt at cheaper rates,
  3. The need to support the economy by maintaining an accommodative monetary policy stance to strengthen the ongoing recovery. The macro and business environment fundamentals might have constrained the transmission of further accommodative cuts, despite the need to stimulate economic growth. Therefore, we believed that any additional rate cuts would not lead to a rise in private sector credit growth as elevated credit risks persisted in the operating environment, and,
  4. The FY’2021/22 National Budget Statement indicated that the government would set aside Kshs 23.1 bn under the Economic Stimulus Programme, with Kshs 2.6 bn going towards improving liquidity to businesses and Kshs 6.4 bn allocated to education. Furthermore, we expected that funds would also be directed towards reviving sectors such as Tourism and Hospitality that were negatively impacted by the pandemic, and as such, we believed that the MPC would be under less pressure to pursue additional policy measures.

In the July meeting, the Monetary Policy Committee also noted that the current account deficit to GDP was estimated at 5.4% in the 12-months to June 2021, a 0.2% points increase, from 5.2% recorded over a similar period in 2020.

Below, we analyze the trends of the macro-economic indicators since the July 2021 MPC meeting, and how they are likely to affect the MPC decision on the direction of the CBR:


Experience since the last MPC meeting in July 2021

Going forward

Probable CBR Direction


Probable CBR Direction (September)

Government Revenue Collection

·    Total revenue collected as at the end of August 2021 amounted to Kshs 272.4 bn, equivalent to 15.3% of the original estimates of Kshs 1,775.6 bn and is 92.0% of the prorated estimates of Kshs 295.9 bn. The performance, despite the challenges posed by the COVID-19 pandemic on business conditions and people’s income, is mainly attributable to; (i) enhanced compliance enforcement efforts and the implementation of new tax measures focused on ensuring that that non-compliant taxpayers pay their due taxes, (ii) introduction of new taxes such as digital services tax and voluntary tax disclosure as KRA bid to expand sources of revenue, and, (iii) the reopening of the economy as more people continue to get vaccinated leading to improved domestic consumption and external demand

·     We expect the implementation of the Finance Act 2021 which brought changes to the Excise Duty Tax, Income Tax as well as the Value Added Tax to expand the tax base and consequently enhance revenue collection. The gradual economic recovery and the relaxation of the COVID-19 measures is also expected to boost KRA’s revenue collection for FY’2021/2022




Government Borrowing

·    The Government, as of 17th September 2021, was 76.9% ahead of its prorated borrowing target of Kshs 152.0 bn having borrowed Kshs 268.9 bn and has domestic maturities worth Kshs 715.9 bn. The government  will have to borrow Kshs 41.2 bn monthly to meet its domestic borrowing target of Kshs 658.5 bn in the 2021/2022 fiscal year

·    The government has raised USD 714.5 mn (Kshs 77.0 bn) from the IMF, USD 130.0 mn (Kshs 14.1 bn) from the World Bank and USD 1.0 bn (Kshs 107.8 bn) from the Eurobond issue, totalling USD 1.8 bn (Kshs 198.9 bn) in external borrowing since April 2021

·       The budgetary support received from the IMF under the Extended Fund Facility (EFF)/ Extended Credit Facility (ECF), which is pegged on fiscal and structural reforms aimed at reducing debt-related vulnerabilities, is expected to lead Kenya on a path to debt sustainability,

·       However, the government’s high borrowing appetite could mean that the country is heading towards levels of distress given the high debt servicing obligations, and,

·        We believe that the with the slow recovery in sectors such as Tourism, fiscal consolidation will continue to remain a concern in medium term




·       Y/Y inflation for August came in at 6.6%, while the m/m inflation came in at 0.2%. The increase was mainly attributable to the increase in the y/y food and non-alcoholic beverages, transport, Housing, water, electricity, gas and other Fuels inflation prices which increased by 10.7%, 7.9 and 5.1% respectively

·       Y/Y inflation increased to 6.57% in August from 6.55% in July and we expect it to continue on its upward trajectory, mainly due to the increase in the y/y food and non-alcoholic beverages, transport and other fuel inflation prices, and,

·       We expect Inflation pressures to remain elevated in the short term mainly driven by increases in transport costs, food prices, and the impact of the increase in tariffs and taxes as we foresee a concurrent contribution to the increase in the headline inflation, following the removal of the fuel subsidy





·       Since the last meeting, the Kenyan Shilling has depreciated by 1.4% against the US Dollar to Kshs 110.1 as of 17th September 2021, from Kshs 108.5 on 28th July 2021, mainly attributable to increased dollar demand from general importers, and,

·       Forex Reserves have remained stable at USD 9.6 bn (equivalent to 5.9 months of import cover). The Forex reserves remain above the statutory requirement of maintaining at least 4.0-months of import cover, and the EAC region’s convergence criteria of 4.5-months of import cover

·       We project the Kenya Shilling to remain stable, supported by the sufficient forex reserves, currently at USD 9.6 bn (equivalent to 5.9 months of import cover), and the improving diaspora remittances evidenced by a 14.2% y/y increase to USD 312.9 mn in August 2021, from USD 274.1 mn recorded over the same period in 2020

·       The shilling is however expected to remain under pressure in the medium term following the demand from merchandise traders as they beef up their hard currency positions in anticipation for more trading partners reopening their economies globally



GDP Growth

·       Kenya’s economy contracted by 0.3% in 2020, a decline compared to the revised growth of 5.5% recorded in 2019, mainly attributable to a slowdown in economic activities due to emergence of the COVID-19 pandemic which resulted in sharp declines in demand and supply of goods and services, and,

·       The contraction was spread across all sectors of the economy but the sectors that were hard hit included the accommodation and food serving activities, education, and professional and administrative services

·       We expect Kenya’s economy to rebound in 2021, with a projected growth rate of 4.0%-4.5%, driven by the upturn in economic activities following the reopening of the services sectors including education, the recovery in manufacturing, and stronger global demand

·       The World Bank projects the Kenyan economy to register a 4.5% GDP growth in 2021 supported by the gradual recovery of the business environment more so in sectors such as trade, tourism and education which were the worst hit by the pandemic in 2020

·       We however believe that risks abound the economic recovery as more strains of the virus continue to be discovered and slow vaccine inoculation still persists



Private Sector Credit Growth

·       The latest data from CBK indicates that private sector credit growth recorded a 7.7% growth in the 12 months to June 2021, as demand recovered following the increased economic activities

·       The tough economic conditions brought about by the pandemic have increased cash constraints for businesses as well as households with most businesses struggling to keep afloat due to subdued revenues, and,

·       Uncertainties around the pandemic, loss of jobs in the private sector due to closure or business activities, slow post-COVID-19 recovery of some sectors such as tourism and the emergence of new COVID-19 variants coupled with the slow vaccine distribution are expected to negatively affect the financial sector. We expect to see continued caution on lending especially to the tourism and hospitality sectors which are yet to recover from the adverse effects of the pandemic such as global travel restrictions




·    Liquidity levels in the money markets tightened, with the average interbank rate on 17th September 2021 coming in at 4.1%, an increase from the 3.2% recorded during the last meeting on 28th July 2021, as tax remittances offset government payments

·   Liquidity is expected to remain favorable due to:

i.   High domestic debt maturities that currently stand at Kshs 676.5 bn worth of T-bill maturities and Kshs 39.4 bn worth of T-bond maturities as at 17th September 2021, and,

ii.  Low Cash Reserve Ratio (CRR) currently at 4.25% from 5.25% previously. Despite the reduction of the CRR,  lending to the private sector has remained muted




Of the factors that we track, two are negative, three are neutral and two are positive, with our main concern being on rising inflation rates on the back of increasing fuel prices with Super Petrol prices increasing by 6.0% to Kshs 134.7 per litre, from Kshs 127.1 per litre, Diesel prices increasing by 7.4% to Kshs 115.6 per litre, from Kshs 107.7 per litre in September, 2021, and, Kerosene prices increasing by 13.2% to Kshs 110.8 per litre, from Kshs 97.9 per litre. Key to note, 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. However, inflation rates in most of the countries continue to increase steadily, though at a slower rate than during the early stages of the pandemic. For countries like the UK, Inflation rates remained below 2.0% pre-pandemic but jumped to a high of 3.2% in the 12 months to August 2021. For The US, inflation declined marginally by 0.1% points to 5.3% in August coming down from a 13-year high of 5.4% in July, 2021. The table below shows how Central Banks of major global economies that have moved to maintain their interest rates so far:



Central Bank

Inflation Rate before previous MPC meeting

August Inflation Rate

Rate in August 2021

Current Rate




Federal Reserve








Reserve Bank of Australia








Central Bank of Malaysia








People's Bank of China








Bank of England






The main goal of the monetary policy is to maintain price stability and support economic growth by controlling the money supply in the economy. We expect the MPC to maintain the Central Bank Rate (CBR) at 7.00% and monitor closely the inflation rates given the recent rise in fuel prices. Their decision will mainly be supported by:

  1. Inflation remaining within the government's target range of 2.5% - 7.5%. August's inflation stood at 6.6%, the highest reading since the pandemic began. We anticipate the Inflation pressures to remain elevated in the short term mainly driven by increases in food and fuel prices and the impact of the increase in tariffs and taxes as we foresee a concurrent contribution to the increase in the headline inflation. With the possibility of further fuel price hikes, we might see an even higher inflation figure in the coming months as the cost of living remains elevated. Given that the inflation rate has gone beyond the target range midpoint and is still expected to rise, we believe that the MPC might come under pressure in the short term to bring the inflation rates down,
  2. The need to support the economy and credit growth in the private sector. The current macro and business environment fundamentals might constrain the transmission of further easing, despite the need to stimulate economic growth. Kenya’s private sector credit growth in July 2021 stood at 7.7%, below CBK’s target of 10.2%, an indication of the cautious lending by banks towards the Private Sector. We therefore believe that any additional rate cuts will not lead to a rise in private sector credit growth as banks will prefer lending to the government, and,
  3. The need to refine macroeconomic modelling and forecasting frameworks in light of the economy's changing structure and improving the interbank market's functioning which will strengthen monetary policy transmission and operations as they continue to improve public understanding of monetary policy decisions. We expect this to support better anchoring of inflation expectations in view of the changing economic and financial environment, and complement the positive gains made so far.

Disclaimer: The views expressed in this publication are those of the writers where particulars are not warranted. This publication, which is in compliance with Section 2 of the Capital Markets Authority Act Cap 485A, is meant for general information only and is not a warranty, representation, advice,  or solicitation of any nature. Readers are advised in all circumstances to seek the advice of a registered investment advisor.