In a clear extension of its accommodative stance, the central bank in its last scheduled meeting for 2020, left the central bank rate (CBR) at 7.00%.
This has been necessitated by the need to catalyze the fragile economic landscape as businesses and individuals recover from Covid-19 induced shocks.
By all indications, the central bank will continue to prioritize the economic recovery while keeping an eye on inflation.
Although well within the target, the rise in price pressures over the last two months could delay further stimulus from the monetary authority.
In November, headline inflation touched a seven-month high of 5.46% up from 4.84% a month before.
The pressure has been linked to pent-up demand for goods and services following the easing of Covid containment measures with food, transport, and hospitality costs recording the most increases in prices.
Any indications of a pick-up in demand pressures may invite some caution from the regulator although prices may run out of stem if demand fizzles owing to weak credit and labor markets.
Credit risk has increased markedly since the outbreak of the pandemic.
To be sure, banks have restructured Ksh 1.38 trillion, 46.50% of the total banking sector loan book, to provide some flexibility to borrowers and almost doubled loan loss provisions in the third quarter as a precaution given the increased risk of default.
Meanwhile, further caution could stem from the incessant pressure on the Kenya shilling.
Whereas pass through may be weakened by the general slack in demand, further depreciation will inevitably accelerate the price pressures via the import channel.
The shilling registered its worst month yet, shedding about 4.00% against the US dollar in November.
NCBA Research
