Nov 20, 2019

The Monetary Policy Committee (MPC) is set to meet on Monday, 25^th November 2019, 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 23^rd September 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. The Committee also noted the prospective tightening of fiscal policy which would provide scope for accommodative monetary policy in the near term, 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%, coming in at 5.0% in August from 6.3% in July, mainly driven by a decline in food inflation to 6.9%, from 7.9% recorded in July, on the back of improved weather conditions, and
2. Increased private sector optimism as per the MPC Private Sector Market Perception Survey conducted in September 2019, which indicated that the private sector was optimistic about local economic prospects. The private sector expects stable economic growth in 2019, supported by improved macroeconomic environment, which led to increased economic activity in the private sector, implementation of the Big 4 agenda projects, improved weather conditions and political stability.

The Monetary Policy Committee also noted that the current account deficit had narrowed to 4.2% of GDP in the 12 months to July 2019 compared to 5.5% in July 2018, supported by strong growth in diaspora remittances and resilient performance of horticultural and manufactured exports. The decline was also partly attributable to higher receipts from the tourism and transport services as well as lower food imports and import of SGR-related equipment.

Below, we analyze the macro-economic indicators trend since the September 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, two are neutral and four are positive, with the change being on private sector credit growth from negative to positive since the last MPC meeting due to the recent repeal of the interest rate cap.

With the repeal of interest rate cap law, expectations are that the banks will have a bias in lending to the private sector, as they will be able to price for risk appropriately even for more risky borrowers thus stimulating private sector credit growth. As per comments from Central Bank Governor Patrick Njoroge, there are expectations that the repeal of the interest rate cap will eventually unlock the stand-by credit facility with the International Monetary Fund (IMF), after the expiry of a previous program last year, since it was one of the conditions set, thus providing a buffer for the Kenyan Shilling. The Monetary Policy Committee through its assessment of the impact of the interest rate cap in the rate cap era, had also noted that it had weakened the transmission of monetary policy. With the repeal however, there is renewed clarity and certainty in the market’s response to policy signals.

We expect the MPC to cut the Central Bank Rate (CBR) by 50 bps to 8.5% from the current 9.0%, with their decision mainly being supported by:

1. The need to stimulate growth, with GDP growth in 2019 having slowed down averaging 5.6% in H1’2019 lower than 6.4% in H1’2018 and below the CBK’s estimated growth at 6.3%. With the plans of the continued fiscal consolidation by the Government, we believe that a further cut will be necessary to provide the required economic growth stimulus, further boosted by the repeal of the interest rate cap, which going forward is expected to provide more efficient transmission of monetary policy as opposed to the interest rate cap era,  
2. Inflation has remained contained and within the Government set target of 2.5%-7.5%, amid slowed economic growth, thus providing room for moderate stimulus through expansionary monetary policy, and,
3. A further reduction of the Central Bank Rate (CBR), coupled up with the interest rate cap repeal would provide the requisite stimulus to private sector credit growth which has remained below the 5 year average, having grown by 6.3% in the 12 months to August 2019, below the 5-year average of 11.0%.

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.