Central Bank of Kenya to Keep Rates Unchanged as Macroeconomic Stability Persists

Cytonn Investments and Commercial Bank of Africa Limited economic analysts expect the Monetary Policy Committee (MPC) to keep interest rates on hold.

The MPC meets on Wednesday, 27th March 2019, to review the prevailing macro-economic conditions and make a decision on the direction of the Central Bank Rate (CBR).

According to analysts, the stability in markets over the last couple of months reveals an economy at its ‘sweetest spot’. Inflation and the exchange rate are stable and forecasts reveal a fair level of confidence in the economy.

“While the impact of this stability on businesses has been debatable, the enviable posture reduces pressure on the MPC to make any policy adjustments, at least in the near term,” said Faith Atiti and Stephanie Kimani from CBA.

Cytonn Investments are positive on the inflation side with projections that ‘Inflation is expected to remain muted and within the government’s target range of 2.5%-7.5%’. They are also positive on GDP growth and liquidity which is expected to remain high with the heavy maturities of domestic debt in 2019 as well as continued government spending through the various infrastructure investments.

However, they are neutral on government borrowing because it is behind its borrowing target Further, they are negative on Private sector credit growth which is expected to remain low this year due to the interest rate cap.

“Going forward, the key concern lies in the weak private sector credit growth, which was at 2.4% y/y in December 2018, with the highest growth in lending recorded in the finance and insurance at 17.5%, Consumer durables at 11.0%, business services 8.0%, and private households 6.8%, over the same period, respectively,” Cytonn observes.

In addition, CBA is of the view that “While the said macroeconomic stability may still support further easing, reduced prospects of stimulating private sector lending and potential adverse effects of a further surge in liquidity may still support a neutral call on the current stance.”

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Having said that, the market will continue to look out for any guidance from the regulator on the recent ruling by the high court, which declared the law capping interest rates unconstitutional. The implementation of the ruling was however suspended for a year to give the legislature some time to respond and amend. This suggests no material adjustments to interest rate expectation for now. – CBA.

We are of the view that no convincing argument in favor of a repeal of the rate cap has been made to the Members of Parliament to warrant a shift in their policy stance and as such, they are likely to maintain the rate cap while amending the section to make it clear and unambiguous – Cytonn Investments.