The Monetary Policy Committee (MPC) of the Central Bank of Kenya meets Wednesday for a bi-monthly review of monetary policy.
This comes at a time when major central banks across the world are considering a gradual scale back of the unprecedented stimuli released in the wake of the COVID-19 pandemic.
The ‘tightening’ signal follows a period of increased inflation, underpinned by both demand and supply pressures.
Whereas economic uncertainty remains, the record vaccination pace coupled with strong adaptation by businesses and households is underpinning strong recovery prospects across economies.
Locally, the review comes against a backdrop of rising inflation and persistent albeit diminished COVID-related economic uncertainty.
With price stability firmly at the core of its mandate, the recent pressure limits the scope for any further support by the monetary authority.
Risks to the short-term inflation outlook have somewhat firmed to the upside owing to rising food and energy costs.
The persistence of supply chain constraints could see inflation approach the 7.50% upper band target by year-end.
Moreover, a weaker local currency could further amplify the upside risk for the inflation outlook.
However, the absence of demand pressures could still keep overall price pressures within the target band.
Even then, with persistent vulnerabilities, the regulator could show some tolerance to higher inflation suggesting that a move on the policy rate may be unlikely for the remainder of the year.
Accordingly, we expect the central bank to maintain the CBR at 7.00%.