On Tuesday, the Monetary Policy Committee (MPC) maintained its benchmark interest rate at 9.00% for a second time with expectations that the headline inflation will remain within the 2.50% – 7.50% target band.
“Inflation expectations remained well anchored within the target range,” Governor Patrick Njoroge said.
It was evident that the biggest challenge for the central bank is the rate cap which continues to interfere with the monetary policy-making transmission with further evidence of perverse outcomes.
“An updated assessment showed that the caps had weakened the effectiveness of monetary policy transmission, with further evidence of perverse outcomes. In particular, the transmission of changes in the CBR to growth and inflation takes longer compared to the period before caps,” said the Central Bank.
Governor @njorogep: The foreign exchange market remains balanced. We expect the current account deficit to narrow to 5.2 percent of GDP in 2018 from 6.2 percent in 2017. pic.twitter.com/3086Xbd7JZ
— Central Bank of Kenya (@CBKKenya) November 28, 2018
Most economic analysts were not surprised by the rate being retained. However:
Mohamed Wehliye, advisor at Saudi Arabian Monetary Authority
“Lending rates fixed. FX CBK controlled. King’eero Institute no longer is bothered with KE monetary policy. The levers don’t work anymore. Institute now uses prices of maize and avocados as monetary policy tools.”
Moses Harding – Advisor, Investment Banking
“Macroeconomic dynamics and monetary conditions have remained in “business as usual mode” without any extraordinary developments and/or unforeseen shocks in the absence of any kind of amendments in “rate cap stance”; it’s good to be in the status-quo post the front-loaded rate cuts!
Macroeconomic dynamics and monetary conditions have remained in “business as usual mode” without any extraordinary developments and/or unforeseen shocks in the absence of any kind of amendments in “rate cap stance”; it’s good to be in status-quo post the front-loaded rate cuts! https://t.co/l93M4BvfMf
— Moses Harding John (@mosesharding) November 27, 2018
“Inflation is well-anchored thanks to the absence of growth-push factors (with no pressure on supply-side constraints), and now from collapse in Brent Crude; there’s room for more rate cuts if the Government delivers on rate cap repeal, which would be the required growth boosters! He adds.
Genghis Capital
“We expect CBK to keep on tightening to protect the shilling which from all indications they want to remain below the psychological level of 103.”
Faith Atiti and Stephanie Kimani, analysts Commercial Bank of Africa
“The committee downplayed the recent exchange rate volatility, painting a “balanced” market characterized by a declining current account deficit which it projects to narrow further to 5.2% of GDP by year-end compared to 6.4% a year earlier.”
“The retention of status quo should see the persistence of the recent market trends. Short-term rates will continue to ease gradually on increased liquidity allocation towards government securities, underlined by the banking sector’s liquidity ratio of 48.9%. Meanwhile, the exchange rate could witness more volatility in the interim although short-term liquidity squeeze may offer some support.”
Sterling Capital
We anticipate inflation to remain below 6% between November and January due to stability in food prices following the onset of rainfall across the country.
We expect the shilling to remain within levels of KES.101-102.50 to the US$ in the short term supported by improving diaspora remittances, stronger inflows from tea and horticulture exports as well as tourism
sector earnings.
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In response to the International Monetary Fund (IMF) review on Kenya’s economic health report, that the Kenya shilling risked being classified as “managed” rather than operating on the forces of demand and supply, the Central bank Governor said the formula used was created for advanced economies, not for emerging markets.
“We are being used as a guinea pig on the External Balance Assessment-Lite methodology. The methodology was used in a black box environment. Data went in, whatever popped out was what was presented and obviously, that was something we would not agree with,” said Dr. Njoroge after the post MPC meeting on Wednesday.
Read: Why the Kenyan Shilling is stronger besides uncertainties – Analysts
Governor @njorogep: The CBK’s own calculations support the view that there is no fundamental misalignment reflected in our exchange rate. The Kenya Shilling reflects the currency's true, fundamental value. pic.twitter.com/68ksIDY2zh
— Central Bank of Kenya (@CBKKenya) November 28, 2018
