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Raise Policy Rate to Contain Inflation: Kenya Bankers to CBK

The MPC has maintained the Central Bank Rate (CBR) at 7.00 per cent for the thirteenth consecutive time.

David Indeje is Khusoko’s Digital Editor, covering East African markets.
Kenya’s banking sector is clamouring for a rise in the policy rate to rein in inflation and the destabilizing effects on the macroeconomy.

Patrick Njoroge Photographer: Luis Tato/Bloomberg

Ahead of the Central Bank of Kenya’s (CBK) monetary policy review on May 30, the Kenya Bankers Association (KBA) has proposed the central bank should raise its policy rate to boost market stability. 

“In our view, recognizing that monetary policy is a short-term macroeconomic stabilization tool, and to avert higher inflationary pressure and its consequent depressing effects on economic recovery, there is need to tighten monetary policy via a raise in the policy rate,” the Kenya Bankers Association Centre for Research on Financial Markets and Policy® said in a Research Note Wednesday.

“This would signal a tightening of financial conditions, ease the exchange rate weakening and avert more macroeconomic instabilities in the short term. Failure to effect this, at this point, risks calling for a higher magnitude raise in the policy rate in the near future with its attendant effects of market instabilities.”

Most economists have said CBK is likely to raise the policy rate, as upside risks to inflation are high.

“We expect the central bank to begin raising interest rates mid this year to avert prolonged price pressure due to de-anchored expectations. Much as demand pressures remain somewhat mute, with core inflation at 2.8%, heightened expectations have the potential to turn into real pressure if prolonged,” NCBA Research.

Kenya’s consumer price index increased to 6.47 per cent in April from 5.56 per cent in March of 2022 driven by high food prices.

Analysts note that if left unattended, it “risks undermining economic recovery in the near to medium term”.

“In addition, the weakening exchange rate is likely to compound imported inflationary pressure that is already in place as a result of the increases in the global commodity prices,” KBA notes.

However, Cytonn Investments says it expects the MPC to maintain the Central Bank Rate (CBR) at 7.00 per cent.

“We anticipate the MPC taking a wait-and-see approach as it continues to monitor the country’s economic recovery, with a focus on the need to stimulate economic growth rather than curtail post-pandemic recovery.” 

“We however believe that risks abound the economic recovery on the back of the emergence of new COVID-19 variants and rising political pressures ahead of the August 2022 elections. As such, we believe that the MPC will keep monitoring the macro-economic indicators before pursuing any additional policy measures. Additionally, given the Russia – Ukraine geopolitical risks, we expect the MPC to monitor how the country might be affected and react appropriately.”

The MPC has maintained the Central Bank Rate (CBR) at 7.00 per cent for the thirteenth consecutive time, citing that the accommodative policy stance adopted in March 2020, which saw a cumulative 125 bps cut, was having the intended effects on the economy.

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David Indeje is Khusoko’s Digital Editor, covering East African markets.

In my role as Community Engagement Editor For Khusoko, I care about our audience. engaging them, getting news delivered to them across a variety of platforms, and expanding the diversity of voices on our website.

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