Jul 17, 2019

The Monetary Policy Committee (MPC) is set to meet on Wednesday, 24^th July 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 May 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, despite the possible spill overs of the food and fuel price increases, 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 within the target range of 2.5%-7.5%, despite rising to a high of 6.6% in April from 4.4% in March, mainly driven by a flare in food inflation following the late onset of long rains coupled with a rise in fuel prices, and
2. Increased private sector optimism as per the MPC Private Sector Market Perception Survey conducted in May 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, growth in the tourism sector, a stable macroeconomic environment and investor confidence in the economy.

The Monetary Policy Committee also noted that the current account deficit had narrowed to 4.5% in the 12 months to April 2019 compared to 5.5% in April 2018, supported by strong growth of agricultural exports particularly coffee 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.

Below, we analyse the macro-economic indicators trend since the May 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. Considering the heavy domestic debt maturities which currently stand at Kshs 949.2 bn for FY’2019/20, 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.
2. Expectations of inflationary pressures remaining within the Government set range of 2.5%-7.5%. Risks are however abound in the short term, due to the expectations of food supply shocks specifically grain prices expected to lead to a surge in prices, with the Agriculture ministry’s push for duty-free maize importation from the month of July to plug the grain deficit being blocked by the National Assembly’s Agriculture committee.

We maintain our view that the key concern still lies in the weak private sector credit growth, despite improving to a 31-months high of 4.9% in the month of April 2019, from 4.2% recorded in March and higher than the 3.3% average in 2018. 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, with the loans having a repayment period of between 1 and 12 months and an interest of 9.0% per annum. Small business owners, youth and women are also expected to access loans from the state under the new Biashara Kenya Fund from rates of 6.0% on a monthly reducing balance as per the regulations tabled by the Treasury in parliament for approval.

The Cabinet Secretary, National Treasury and Planning, Mr. Henry Rotich during the Budget reading also proposed a repeal of the interest rate cap should be adopted in order to unlock credit, which would in effect boost the performance of the economy, and consequentially boost taxable income available. The Central Bank of Kenya has also 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.