The Central Bank of Kenya (CBK) is likely to retain the base lending rate at seven percent, analysts say.
The Monetary Policy Committee of the CBK meets Wednesday to take stock of the developments in the pandemic-hit economy since its last meeting in June and chart a way forward, against the backdrop of stable inflation and exchange rate.
In June, the headline and core inflation eased sharply to 4.59 percent and 1.6 percent respectively in June reflecting reduced demand and food price pressures.
In the previous MPC meeting held on June 25, the regulator maintained the Central Bank Rate (CBR) at 7.00 percent.
Stephanie Kimani and Faith Atiti, NCBA Research
In spite of the recent easing of mobility restrictions, the economic outlook remains clouded by the uncertainty around the duration of the coronavirus pandemic and the degree of the attendant economic damage.
The infection curve has steepened, with no peak in sight and while the progress on developing a vaccine has been encouraging, the actual breakthrough remains uncertain. Even though the government this week refrained from tightening containment measures as in other countries, the economic pain thus far may prove deep and long-lasting.
The combination of low inflation and a widening output gap may support a further easing of monetary conditions. However, given the current liquidity stance, underpinned primarily by fiscal interventions, the MPC is expected to retain the current policy stance.
Moreover, given the nature of the shocks, the efficacy of monetary policy in stimulating demand remains doubtful. To be sure, despite the recent spate of rate cuts (CBR & CRR), private sector lending has stunted, at best.
Genghis Capital Research
The MPC has slashed the benchmark rate by 125bps to 7.00 percent in the COVID-19 period. Nonetheless, we doubt the efficacy of the policy cuts with inflation charting a disinflationary trend in the second quarter. The July inflation data, expected at the tail end of the week, is expected to remain steady (headline – 4.6 percent; core – 1.60 percent) at current levels.
Furthermore, we are less convinced that credit to the private sector has picked up in the current environment. Therefore, we broadly think that the MPC will retain the benchmark rate at 7.00 percent.
The main goal of the monetary policy is to maintain price stability and support economic growth by controlling the money supply in the economy. We expect the MPC to maintain the CBR at seven percent.
On Tuesday, the Kenyan shilling traded at 107.85 against the US dollar attributed to the high demand for the dollar by importers with businesses positively responding to post- Covid-19 lockdowns opportunities.
Against the Sterling Pound, it depreciated to 136.74 from 134 while trading against the Euro currently trading at 123.21.