CBK Monetary Policy Committee meets next week; what to expect

High Market Liquidity Helps Kenya Treasury to Access Cheaper Deficit Financing

Central Bank of Kenya building

The Central Bank of Kenya (CBK) Monetary Policy Committee (MPC) is scheduled to meet on Tuesday.
The meeting comes after the MPC maintained the interest rate at 9.00% on September 25 against a backdrop of rising inflation expectation and indicated its neutral stance would give it time to assess the second round effects arising from the reintroduction of Value Added Tax (8.0%) on petroleum products on overall price stability and any perverse response to its previous decisions.

Further, the continued slow growth of private sector credit and a relatively stable macroeconomic environment where growth has improved compared to last year.

However, October’s Stanbic Bank Kenya Purchasing Managers’ IndexTM (PMITM) “Kenyan private sector firms saw a stronger improvement in operating conditions in October in particular, export demand grew rapidly, while new projects and favourable weather conditions also boosted output.”

The International Monetary Fund (IMF) review on Kenya’s economic health report, said the shilling risked being classified as “managed” rather than operating on the forces of demand and supply.

However, the CBK said according to its calculations the Kenya shilling reflects the currency’s true, fundamental value.
Earlier, in September Yvonne Mhango, Sub-Saharan Africa Economist at Renaissance Capital had said: “We found the KES overvalued, but at a low risk of depreciation due to solid buffers.”

Analysts expect the shilling to remain relatively stable to the dollar in the short term supported by improved diaspora remittances which increased by 71.9% y/y to USD 266.2 mn in June 2018 from USD 154.9 mn in June 2017 and by 4.9% m/m, from USD 253.7 mn in May 2018, stronger inflows from exports (tea and horticulture), high levels of forex reserves currently at USD 8.1 bn, equivalent to 5.3-months of import cover.

Absa Africa Financial Markets Index 2018 access to foreign exchange, Kenya earned the highest marks in the pillar, a significant improvement from ranking sixth last year. “The relaxation of capital controls boosted its performance, as did improvement of the country’s net portfolio flows to reserves ratio.”

However, the week ending 16 November, the Kenya Shilling depreciated by 1.3% against the US Dollar to close at Kshs 103.2, from Kshs 101.9 recorded the previous week, attributed to increased dollar demand by companies in the oil, manufacturing and energy sectors to close end of year orders ahead of the December holidays.

Cytonn Investments said, “All the gains made by the Kenya Shilling this year were eroded this week as it reached a 10-month low at Kshs 103.2, the same price it closed the year 2017.”

As a result, Kenya’s forex reserves have fallen by 8.9% to USD 8.1 bn, from USD 8.9 bn since the start of the FY’2018/2019 in July Cytonn investments noted.

“Over the last one month, Kenya’s foreign exchange reserves have declined by USD382 Mn, likely due to Central Bank activity in the market. On average, this represents an equivalent of about KES 39Bn in liquidity mop up,” CBA Analysts state.
Since September 25, the shilling’s exchange rate against the dollar has moved from 100.85 units to 102.35, having touched a low of 103.20 on November 16.

While some economists are expecting a “cautionary, perhaps a little more hawkish” stance.

“Given that underlying inflation fundamentals remain somewhat stable with the lethargy in the credit market likely to persist, the regulator is this month likely to remain neutral on its policy stance but indicate its willingness to act should risks to inflation especially from the currency depreciation remain,” Stephanie Kamau and Faith Atiti from CBA Group say.
“As the MPC meets, our baseline expectation is that the committee will retain the policy rate at 9.00% as a signal of sustained monetary accommodation,” the note.

On the other hand, Cytonn Investments state that, “The MPC should adopt a wait and see approach, given the macro-economic environment is relatively stable. We, therefore, expect the MPC to hold the CBR at 9.0%.” 

Kingdom Securities analysts expect there will be some upward inflationary pressure arising out of the tax on petroleum products, it would remain within the CBK’s preferred range of 2.5 to 7.5%. “On the back of the stability present in the macroeconomic environment, we portend the MPC to leave the CBR unchanged at nine percent during the next meeting,” said Kingdom Securities.

Cytonn Investments further reiterate that “The Key concern, however, remains the effectiveness of monetary policy with the interest rate cap still in place. The Central Bank Rate (CBR) has lost its signalling role as interest rate controls have weakened the link between the CBR and bank lending and deposit rates. “

Genghis Capital also expect the rate to be maintained. “The macroeconomic environment remains stable despite uncertainty surrounding the Shilling and hence we expect the MPC to leave the CBR unchanged at 9.0%. Moreover, PSCG is expected to remain low. The tighter fiscal stance from the Finance Act 2018: Reduced government spending in FY18/19, coupled with the higher taxes, is likely to stifle growth rate in 2018 and thus exacerbate the output gap in the economy.” 

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