Coronavirus Outbreak, External Shocks: Kenya Central Bank’s MPC Meeting Touted as ‘Key Risk Event’

Remittance inflows continue to provide a stable source of foreign exchange for Kenya and key support for many households

Dr Patrick Njoroge, CBK Governor Displaying some of the new currency Notes

The Central Bank of Kenya’s (CBK) Monetary Policy Committee will meet to set lending rates on March 23, at the backdrop of the Covid-19 pandemic.

At its last bi-monthly meeting on January 28 the MPC cut the central bank rate by 25 basis points to 8.25 percent, noting the economy was operating below its potential.

There is a projection that the MPC will cut the benchmark rate.

Researchers at NCBA see the MPC like its global peers, the central bank will be taking proactive measures to minimize risks to growth from the coronavirus outbreak and other unforeseen external shocks.

“To this end, the upcoming MPC meeting scheduled for 23rd March should be a key risk event with potential to deliver up to 50bps rate reduction.”

“ Whereas inflation expectations have risen, a rate hike may not anchor expectations, currently underpinned by supply factors. On a brighter note, the drop in oil prices should provide some relief.”

Globally, there is consensus that Central Bank’s monetary policy responses to the coronavirus crisis need to provide support to the economy.

Luca Fornaro, Junior Researcher, CREI; Adjunct Professor, Universitat Pompeu Fabra; Research Professor, Barcelona GSE and Martin Wolf Assistant Professor, University of Vienna; CEPR Research Affiliate jointly in ‘Coronavirus and macroeconomic policy’ in their analysis, they suggest that:

“The supply disruption caused by the coronavirus epidemic, if it turns out to be persistent, might cause a severe slump driven by weak aggregate demand. In this case, drastic policy interventions – both monetary and fiscal – might be needed to prevent the negative supply shock triggered by the coronavirus spread from severely affecting employment and productivity.” 

Injecting liquidity and cutting interest rates

Tobias Adrian, Financial Counsellor and Director of the IMF’s Monetary and Capital Markets Department argue that, the sharp tightening in financial conditions, along with expectations of low inflation, means that monetary policy has a role to play at the current juncture. 

He writes that Central banks can act quickly to help ease the tightening of financial conditions by injecting liquidity and cutting interest rates, thus preventing a possible credit crunch.

“Policymakers must act decisively and cooperate at the global level to preserve monetary and financial stability during this time of extraordinary challenges.”

Central Bank of Kenya Cuts Lending Rates to 7.25pct and Reserve Ratios for Banks

In the US, the Fed’s emergency 50bps rate cut helped calm markets albeit temporarily. 

“The Fed’s response may herald some temporary respite to emerging and frontier markets on several fronts. First, the rate cut should provide headroom for additional accommodation with limited risk of capital flight on this backdrop. 

Secondly, a weaker US dollar should ease debt service pressure by reducing interest on some UST or Libor linked loans. Lastly, a weak dollar may favor net importers although benefits may be diluted by the current supply shocks,” Researchers at NCBA comment.

In relation to the bond markets, they observe that Kenya is likely to be a key target in SSA given its history in withering external shocks thanks to economic diversification. Infrastructure bonds are always a favorite but the appetite may extend to the traditional yield curve if expectations of ‘zero-bound’ interest rates in the US crystalize.