Analysts are divided over the likelihood of the central bank’s
rate-setting Monetary Policy Committee (MPC) keeping the benchmark
number at nine per cent at its meeting scheduled for Tuesday.
During
the last sitting on July 30 the MPC, which meets every two months, cut
the benchmark lending rate by 0.5 percentage point, signalling a drop in
the cost of loans by a similar margin.
Two of the four
analysts polled tipped the Central Bank of Kenya (CBK) to keep the key
rate at 9 per cent while the rest expect a cut of about 50 per cent.
Those who are looking at a retention noted several
uncertainties, including the troubled transmission of monetary policy in
the current environment as well as potential external challenges.
“We
expect the CBK to hold interest rates given a number of uncertainties,
including the transmission of monetary policy in the current environment
(loan rate cap in place, but the deposit floor has gone) and external
uncertainties – a selloff in key emerging markets that could yet
threaten inflows into frontier and emerging economies more
significantly,” said Razia Khan, chief economist for Africa at Standard
Chartered.
Ms Khan also noted the rise in the oil price will also be a concern for the CBK.
Her sentiments were echoed by Nairobi-based independent analyst and CEO of Rich Management, Aly-Khan Satchu.
“The
biggest single challenge for the MPC is that the rate cap has
interfered with monetary policy-making transmission. Clearly VAT is set
to bump inflation and now that we have ''stop-lossed'' the IMF, the
shilling will need more support,” said Mr Satchu.
“Moreover, the trend in emerging and frontier markets is for
higher interest rates in order to push back at a stronger dollar.
Therefore, when I take all these into consideration, I see no real
purpose behind a rate cut other than one of signalling.”
But according Deepak Dave, the founder of Riverside Capital Advisory, the MPC is likely to vote for a 50 basis points cut.
“In
present circumstances the liquidity premium has narrowed given tenor
restrictions, and in such cases one expects the Central Bank Rate should
be altered to reduce the premium and rebalance the yield curve,” said
Mr Dave.
In a pre-MPC note Commercial Bank of Africa
(CBA) said: “While the conduct of monetary policy may be complicated by
the current uncertainty on the fiscal side, the current low level of
inflation at 4.04 per cent, relative currency stability and potential
for sustained negative output gap with the aforementioned austerity
could be ground for further accommodation.”
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