May 25, 2019

The Monetary Policy Committee (MPC) is set to meet on Monday, 27^th May 2019, to review the prevailing macro-economic conditions and make a decision on the direction of the Central Bank Rate (CBR). In their previous meeting held on 27^th March 2019, the MPC maintained the CBR at 9.0%, citing that the economy was operating close to its potential and inflation expectations remained anchored within the target range thus the prevailing monetary policy stance remained appropriate. This was in line with our expectations as per our MPC Note, informed by the country’s macroeconomic fundamentals, which had remained stable as well as sustained optimism on the economic growth prospects, as evidenced by:

1. Inflation expectations, which had remained well anchored, within the target range, declining to 4.1% in February 2019 from 4.7% recorded in January 2019 mainly driven by a 0.5% m/m decline in the transport index attributable to a decline in pump prices of petrol and diesel, and
2. Increased private sector optimism as per the MPC Private Sector Market Perception Survey conducted in March 2019, which indicated that the private sector was optimistic about local economic prospects. The private sector expects stronger economic growth in 2019, continued infrastructure development, expectations of adequate agricultural production despite the delayed onset of the long rains in most parts of the country and a stable macroeconomic environment.

The Monetary Policy Committee also noted that the current account deficit had narrowed to 4.7% in the 12 months to February 2019 compared to 5.5% in February 2018, supported by strong growth of agricultural exports particularly tea and horticulture, improved diaspora remittances, and tourism receipts. The decline was also partly supported by the slower growth in imports due to lower imports of food and machinery.

Below, we analyse the macro-economic indicators trend since the March 2019 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, one is negative, two are neutral, and three are positive, with no changes since the last MPC meeting. We believe that the MPC will maintain the current policy stance, given the macro-economic environment is still relatively stable. We therefore expect the MPC to hold the CBR at 9.0% with their decision being supported by:

1. Expectations of easing of the recent inflationary pressures, which had mainly been driven by food supply shocks specifically grain prices with maize recording a 26.1% rise m/m leading to a 29.8% rise in the prices of maize flour. The surge in prices is however expected to be mitigated by the current measures being undertaken by the Government, key of which being the release of 3 million bags of maize from the strategic food reserves that has eased the grains shortage curbing rising flour prices
2. The stability of the Kenyan Shilling having already gained by 0.6% YTD in 2019 and recording a 4-year high of Kshs 99.7 against the dollar during the year, reflecting a more stable economic environment,
3. Considering the heavy domestic debt maturities which currently stand at Kshs 1.0 tn for 2019, we believe the MPC will maintain the CBR at the current rate, in order for the Government to continue accessing domestic debt at cheaper rates. This however might have adverse effects of further crowding out of the private sector.

The key concern continues to be the weak private sector credit growth, which was at 3.4% y/y in February 2019, lower than the 5-year average of 11.9%, with the highest growth in lending being recorded in consumer durables at 16.2%, finance and insurance at 13.1%, manufacturing at 7.7% and trade at 6.4%. This was a decline from 3.0% recorded in November and below the 3.3% average recorded in 2018. Despite the 100 bps cut of the policy rate in 2018, no significant change has been recorded in private sector credit growth which remains anaemic due to the effects of the interest rate cap. On this front we have seen various measures being put in place to address the low private sector credit growth with the recent initiative being the launch of Stawi, a mobile loan product led by five commercial Banks targeting micro, small and medium scale enterprises. As a result, the Central Bank of Kenya has continued to express concern over the effectiveness of monetary policy with the interest rate cap still in place. The Monetary Policy Committee through its assessment of the impacts of the interest rate cap noted that it has weakened the transmission of monetary policy. In particular, the transmission of changes in the CBR to growth and inflation takes longer compared to the period before implementation of the interest rate cap.

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.