Central Bank of Kenya Expected to Ease Monetary Policy to Stimulate Economy

High Market Liquidity Helps Kenya Treasury to Access Cheaper Deficit Financing

Central Bank of Kenya building

The Central Bank of Kenya is expected to ease its monetary policy by cutting its base lending rate further between 0.25 percent and 0.75 percent in an effort to stimulate the economy.

The MPC meets Wednesday. 

In its previous meeting, it cut the policy rate by 100bps to 7.25 per cent from 8.25 per cent and reduced the Cash Reserve Ratio requirement to 4.25 per cent.

Market analysts expect a dovish stance from the MPC.

“We maintain our view that monetary policy stimulus measures may not be effective in combating the effects emanating from the Covid-19 pandemic especially in some sectors such as tourism which have been hit by demand-side issues. We believe what businesses and the economy as a whole needs is financial relief,” notes Cytonn Research MPC note.

Genghis Capital is of the view that the global markets remain uncertain.

“The MPC meeting, unlike the previous one, will be flying less blind in regards to developments surrounding Covid-19. The pandemic presents a unique shock that hitherto projections are serving at best as rear-view mirrors. That said, we are of the view that the risks to economic growth are skewed to the downside,” noted the researchers.

According to the World Bank Kenya Economic Update: Turbulent Times for Growth in Kenya – Policy Options during the COVID-19 Pandemic, monetary policy easing and exercising regulatory forbearance might be necessary as long as conditions remain difficult.

“While the crisis is likely to lead to another round of increased non-performing loans, lower interest rates will stimulate activity generally, helping ease the burden on businesses whose activities have been disrupted.”

“It may also be appropriate to provide more liquidity support to banks that are likely to be affected by deterioration of credit quality or facing funding pressure while at the same time experiencing urgent demand for short-term credit from Small and Medium-Sized Enterprises (SME) and other firms,” World Bank says in its report.