Kenya Monetary Policy Committee Meet on Jan 27; What to Expect

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Central Bank of Kenya Kisumu Branch I Khusoko

Kenya’s central bank will hold its first Monetary Policy Committee (MPC) meeting of 2020 on Monday, January 27. Market analysts show varied projections on what they expect from the MPC meeting.

Genghis Capital expects a single monetary policy 50bps rate cut in the second half of the year.

“The reaction function to be adopted by CBK will likely be a wait-and-see approach, as it filters the effect of its November MPC rate cut decision,” they note.

EFG Hermes Kenya Ltd. and  Stanbic Bank expect a ‘boost’ in 2020 to the Kenyan economy, as the repeal of rate caps boosts credit growth, complemented by steady growth in agriculture and higher capital inflows as sentiment improves. But, they have varied opinions.

“The repeal of the interest capping law is another factor that we see as a net positive for GDP growth. Granted, non-performing loans remain elevated and have been sticky,” said Stanbic Bank Regional Economist East Africa Jibran Qureishi at the bank’s economic forum in Nairobi.

EFG Hermes says with the repeal of the rate caps, they expect three main changes in economic forces. 

“First, we see the move providing the floor for monetary policy to enhance its transmission; we, therefore, see room for the Central Bank of Kenya (CBK) to cut policy rates in 2020.”

They note that inflation backdrop is also supportive of monetary easing with expectations it will be maintained in 2020, leaving inflation well within the CBK’s targeted inflation band of 2.5% to 7%. 

“Key risks to the inflation outlook in 2020 are new tax measures, the revival of demand-side pressures and fluctuations in the rain season,” they note.

Worrying fiscal trends

They, however, say the boost to growth outlook stands in contrast to the still-worrying fiscal trends, where the government is under pressure to deliver much-needed fiscal consolidation amidst rising debt. 

“Tax revenue’s share in GDP has been on a sustained decline lately, driving the Treasury to scale back spending; thereby, delivering a low-quality fiscal consolidation that has also not prevented debt levels from climbing. We also remain wary of government borrowing costs in 2020, as yields may face upward pressure, due to lower demand on gov’t debt from commercials banks.”

The same sentiments are shared by Genghis Capital, Cytonn Investments and Qureishi. 

“If we do not sort out our fiscal issues, we are going to have a very unpredictable taxation regime, which will not just entail arbitrary assessment but also taxes that would hamper productive sectors,” Qureishi said as quoted by The Business Daily.

Genghis Capital, an Investment firm in Nairobi in their 2020 Playbook dubbed ‘Harnessing Value’, they do not see the government achieving the consolidation target.

“On the economic front, we expect a Gross Domestic Product (GDP) growth rate of 5.7% with expected protracted challenges in private consumption due to deterioration in the business environment. Additionally, we do not see the government achieve its fiscal consolidation efforts (5.6% fiscal deficit) expected at 7.0% this year,” said Genghis Capital.

According to the Analysts, “All factors held constant, it would be rash to believe that removal of the caps would significantly boost the economy. While we are of the opinion that the caps were not aiding the economy, their removal serves to undo a misstep, not provide a form of stimulus package to the economy.”

According to Cytonn Investments, despite expectations of a bias towards expansionary monetary policy in 2020 to support economic activity, “We still expect upward pressure on interest rates due to increased pressure on the government to meet its domestic borrowing target to plug in the fiscal deficit, in the current post- interest rate cap era,” in its 2020 markets outlook.

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In its last meeting in November, the MPC cut the Central Bank Rate (CBR) by 50bps to 8.5% following the repeal of the interest rate cap.

However, it said the economy was operating below its potential.

In announcing its decision, Dr Patrick Njoroge, the MPC  chair said, “This reform should restore the clarity of monetary policy decisions and strengthen the transmission of monetary policy.”

Njoroge further said the  Committee had noted the ongoing tightening of the fiscal policy stating there was room for accommodative monetary policy to support economic activity.