Monetary Policy Committee (MPC) of the Central Bank of Kenya is likely to leave the key interest rates unchanged at its first bi-monthly policy review Wednesday, on a backdrop of continued economic recovery on the upside and potential inflation risks on the downside., according to market analysts.
The MPC maintained the Central Bank Rate (CBR) at 7.00 per cent and the Cash Reserve Ratio of 4.25 per cent, for the sixth straight policy meeting in 2021.
According to the Central Bank, measures implemented since March 2020 were having the intended effect on the economy and as such, remained appropriate and effective.
In 2022, market analysts are of the view that the MPC will continue holding the rates at the same level as they try to balance between supporting the country’s economic recovery and maintaining a stable price environment and at the same time protecting the currency.
“On inflation, rising food inflation due to unfavourable weather, higher oil prices and commodity prices may see an upturn in inflation after a three-month decline.
Similarly, global liquidity tightening could worsen pressure on the shilling. Even so, downside risks are not sufficient to trigger a tightening cycle.”
Given the accommodative policy stance utilized in 2020 and 2021, we expect the same to be maintained in H1’2022 with the intention of continued support to the economy from the adverse effects of the pandemic.
There is however the risk of the yield curve adjusting upwards especially in Q3’2022 as the government compensates investors for the increased risk and uncertainty posed by the elections.
“We see the committee retaining the benchmark policy at 7.0 per cent. For now, inflation remains anchored within the set range of 5+/-2.5 per cent, with core inflation subdued below the 3.0 per cent mark.
The committee will also be cognizant of the potential unsustainability of the price stabilisation program as global crude oil prices soar.
As printed in the CBK’s 3Q21 Quartley Economic Review, private sector credit growth remains tepid.
Additionally, banks remain risk-averse with credit to government growing by 8.7 per cent in 3Q21 in comparison to a slower 2.7 per cent rise in credit to the private sector.”
The International Monetary Fund
Effective monetary policy communication is a key tool to avoid provoking overreactions from financial markets. In countries where inflation expectations have increased, and there is a tangible risk of more persistent price pressures, central banks should continue to telegraph an orderly, data-dependent withdrawal.
This is particularly important given the exceptional uncertainty around the impact of the Omicron variant.
Central banks should clearly signal that the pace at which monetary support will be withdrawn may need to be recalibrated if the pandemic worsens again.
Moreover, a tighter stance of monetary policy, especially if not clearly communicated, could have financial stability implications as financial vulnerabilities remain elevated in a number of sectors.
A sudden repricing of risk in markets, should investors reassess further the economic and policy outlook, could interact with such vulnerabilities and lead to tighter financial conditions.
Policymakers should take early action and tighten selected macroprudential tools to target pockets of elevated vulnerabilities.