Tough inflation test as CBK team meets

Central Bank of Kenya Governor Patrick Njoroge. FILE PHOTO | DIANA NGILA | NMG

By BRIAN NGUGI
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Summary

• At its last bi-monthly meeting on March 29, the inflation targeting monetary policy committee (MPC) shrugged off heightened global uncertainties to retain its benchmark lending rate.
• The MPC said then its decision was backed by optimism over the performance of the economy as reopening continued and inoculation efforts against Covid-19.

Eyes will be on the monetary policy team of the Central Bank of Kenya (CBK) as it meets today amid projections that inflation would edge higher on costlier fuel against a backdrop of a fragile economy.

At its last bi-monthly meeting on March 29, the inflation targeting monetary policy committee (MPC) shrugged off heightened global uncertainties to retain its benchmark lending rate at seven percent for the seventh time in a row.

The MPC said then its decision was backed by optimism over the performance of the economy as reopening continued and inoculation efforts against Covid-19.

Kenya's year-on-year inflation edged down to 5.76 percent in April, from 5.90 percent in the previous month.

CBK said at its previous meeting recovery in demand coupled with the improved economic activity had led to growth in private sector credit to 9.7 percent in the year to February compared to 8.4 per cent in the 12 months to December.

The credit growth, however, remained well below the central bank’s target rate of 12-15 percent, deemed adequate for supporting economic development.

Analysts say though that while inflationary pressure is likely to be at the forefront of the MPCs thinking, the base rate is unlikely to change, given the need to also stimulate economic growth.

"We expect the MPC to maintain the Central Bank Rate (CBR) at 7.00 percent, with their decision mainly being supported by stable inflation which is projected to remain within the 2.5 to 7.5 percent target range despite the recent increases in fuel prices," said Cytonn in a research note.

"The inflation for the month of April was at 5.8 percent and given the possibility of further fuel price hikes we might see an even higher inflation figure and as such, if inflation continues to rise, there might be some pressure on the MPC in the long term to maintain price stability."

Researchers at CBA projected the MPC to hold the key rate noting that "the current stance remains appropriate and that, the central may have little reason to modify it."

"While the policy body may hold the CBR at 7.00 percent the market will look out for any update on credit markets especially on treatment of potential credit risks from the persistent uncertainty and fragile economic landscape," they said.