CBK expected to keep key policy rate on hold
Central Bank of Kenya (CBK) is expected to retain its benchmark lending rate at June’s historic rate hike to 10.5 per cent during a meeting of its key policy organ tomorrow in order to further anchor inflation expectations.
The banking sector regulator through its Monetary Policy Committee (MPC) raised the policy rate by 100 basis points from 9.50 per cent in its previous sitting on June 26.
Kamau Thugge, the new CBK Governor called an unscheduled meeting of the committee one week after he took office, to raise the policy rate.
The decision came after May inflation showed an unexpected increase, rising to 8 per cent from a 10-month low of 7.9 per cent a month earlier and above market estimates of 7.53 per cent.
But with a slowing inflation, economists now believe that tommorrow’s MPC meeting could see the apex bank retain the current rates, with fears that additional hike in Central Bank Rate (CBR) rate might curtail economic growth.
Private sector
“We expect the MPC to maintain the Central Bank Rate at the current rate of 10.50 per cent, with their decision mainly supported by the ease in y/y inflation in July 2023 and the need to support the economy by adopting an accommodative policy that will support the private sector,” noted an analysis by investment firm Cytonn.
Kenya’s core inflation, which covers goods and services outside of food and fuel and is a better gauge of the underlying trend in prices, came in at 7.3 per cent in July from 7.9 per cent in June, according to government figures.
The drop which also reached the central bank’s target range earlier than expected, came to fore despite an increase in taxes on gasoline that stoked transport costs.
“Based on the recent adjustments in the economic numbers and slowed political happenings, I can only see this go one way, the MPC to retain the current benchmark lending rate…I do not see why they should increase it when things are beginning to align, economically,” Peter Macharia, an economist and the CEO of Jijenge Credit.
Thugge said earlier this month, according to reporting by Bloomberg, that he expects inflation to be back inside the target band of 2.5 per cent to 7.5 per cent by October.
Data by Kenya National Bureau of Statistics (KNBS) indicate that this is the lowest year-on-year inflation since May 2022 when it stood at 7.1 per cent. Surprisingly, the country’s private sector activity fell during the month in question, undermined by slowing business in the services, wholesale and retail sectors in an environment of high inflation and weak consumer spending power.
During the week, Stanbic Bank released its monthly Purchasing Managers Index (PMI), highlighting that the index for the month of July 2023 came in at 45.5, down from 47.8 in June 2023, signaling a stronger downturn of the business environment at the start of Q3’2023.
Cost of living
The strong downturn is mainly attributable to the high cost of living amid rising fuel prices and the sustained depreciation of the Kenya shilling, which continues to wane. It was the fifth month in a row that the PMI had stayed below 50, signalling a contraction in activity.
