Central Bank of Kenya to hold rate at 7pc, experts say

By Lewis Njoka
Tuesday, September 29th, 2020
Central Bank of Kenya. Photo/PD/File
In summary
    • In remarks delivered to mark the opening of the three-day forum last week, Treasury Cabinet Secretary Ukur Yattani underscored the need for the banking sector to continue optimising its operational resilience to sustain industry’s contribution to the economy in light of Covid-19.
    • Government recently announced a Sh10 billion credit guarantee scheme targeting this critical sector of the economy. Yatani expressed conviction that these interventions would facilitate the much-needed access to affordable credit for micro, small and medium enterprises.

Lewis Njoka @LewisNjoka

Experts predict the Central Bank Monetary Policy Committee will retain the Central Bank Rate (CBR) at seven per cent when it meets today.

In its September outlook notes, investments solutions provider, Genghis Capital, says credit headwinds justify the MPC taking a neutral stance. 

If this happens, it will be the fourth time in a row the committee is retaining CBR at seven per cent having maintained the same rate since April when it reduced it from 7.25 per cent so as to improve liquidity and resuscitate an economy reeling from the effect of the Covid-19 pandemic.

“We note that the actual private sector credit has slowed drastically in the pandemic period.

Of the net private sector credit advanced in the year totalling Sh134.4 billion, with Sh44.5 billion was advanced in the May-July period,” said Churchill Ogutu, the head of research at Genghis.

“Against the backdrop of the 125 basis points (bps) rate cuts from the March and April MPC meetings, the slow private sector credit mediation telegraphs the degree of cautiousness to the real sector by banks and non-bank financial institutions,” he added.

Credit growth

Private sector credit growth in July is estimated at 7.9 per cent. His sentiments were supported by Reginald Kadzutu, a project head at Zamara Capital, who said he too does not foresee the committee changing the CBR rate today.

“I don’t think they will vary the rate, they will most likely leave it as it is waiting to see seconf quarter data end of this month.

I don’t think they will make a move to support the shilling using the rate because we don’t get so many foreigners seeking to buy into our domestic market,” he said.

Latest market trends, according to Ogutu, point to a normalised market trend as evidenced by the Central Bank of Kenya (CBK) having engaged in liquidity injection last week through reverse repo instruments.

Of the cumulative Sh90 billion in last week’s tenders, CBK accepted Sh32.85 billion at a weighted average rate of 7.81 per cent. 

“The long and short of this; the market seems to signal the previous monetary policy decisions (150bps rate cut to combat Covid-19 shock and the 100bps slashing of the CRR) have faded,” said Ogutu.

He said the liquidity dry-up in the economy has been worsened by a slow disbursement of government funds through the banking system. 

Domestic borrowing

According to Ogutu, the anticipated Sh60 billion rise in net domestic borrowing, from Sh494.3 billion to 554.6 billion due to revenue underperformance will be a major hindrance to robust private sector credit mediation in the event Covid-19 shock prolongs.

Today's meeting is happening against the backdrop of Covid-19 precautionary measures that continue to have negative economic impacts on businesses and employees