Jan 22, 2020

The Monetary Policy Committee (MPC) is set to meet on Monday, 27^th January 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 25^th November 2019, the MPC lowered the CBR by 50 bps to 8.5% from 9.0%, citing that the economy was operating below its potential level concluding that there was room for accommodative monetary policy to support economic activity. This was in line with our expectations as per our MPC Note, with our view being informed 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 had 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 had 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%.

The Monetary Policy Committee also noted that the current account deficit had narrowed to 4.1% of GDP in the 12 months to September 2019 compared to 5.1% in September 2018, supported by strong growth in diaspora remittances. 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 trends of the macro-economic indicators since the November 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, unchanged since the last MPC meeting. 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 maintain the Central Bank Rate (CBR) at 8.5%, with their decision mainly being supported by:

1. Considering the heavy domestic debt maturities, which currently stand at Kshs 493.0 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. Inflation has remained contained and within the Government set target of 2.5%-7.5%, with inflationary pressure gradually easing off, due to improved agricultural production thus causing a decline in food prices which has a weight of 36.0% in the Consumer Price Index following favourable weather conditions, and,
3. We foresee the Central Bank taking a wait and see approach as it observes the effects of the 50 bps rate cut witnessed in the November 2019 meeting as there remains some opacity in terms of response from the banks and consumers. From the last MPC briefing, the Central Bank of Kenya (CBK) Governor indicated that following the interest rate cap repeal, re-learning by Banks and consumers was essential so that the market can react appropriately to any monetary policy. The Central Bank of Kenya (CBK) Governor also indicated that they were re-calibrating their models so as to determine the effect of changes in the CBR on the other macro-economic indicators such as GDP and inflation over a certain period. Based on this, we believe the MPC will hold the rates steady as they continue monitoring the market reactions of the previous cut.

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.