Commercial Bank of Africa
Policy Committee
The Central Bank

CBK likely to delay further policy cut

The Central Bank is likely to delay making another monetary policy rate cut until the proposed review of the rate cap is carried out, even as a stable economy supports further policy easing.

Economists at Commercial Bank of Africa (CBA) say the regulator’s surprise move to cut the CBR by 50 basis points to 9.5 per cent in the last Monetary Policy Committee (MPC) meeting in March has shaken the market out of the complacency that had set in towards the policy tool, which had remained unchanged since September 2016.

This, they argue, combined with the prevailing low inflation and the stability of the exchange rate, would ideally allow the CBK to carry out further cuts. However, it is unlikely to do so with an eye on the rate cap and its implications given that private sector credit growth remains very low.

“We believe that the expected adjustments to the Banking Act 2016 (Amended) could have considerable implications for the conduct of monetary policy. This could be motivation for the committee to delay any further easing although this may mean more aggressive policy moves in future,” said the CBA economists in the latest weekly fixed income report.

“Moreover, the committee may need more time to measure the impact of the 50 basis point rate cut…while it may be early to assess the impact of the recent rate cut, it is unlikely that lending has significantly increased on this backdrop.”

In the March rate cut, the MPC said inflation was well within the preferred target of five per cent plus or minus 250 basis points. The committee added that there was increased optimism for growth in the economy, while noting that economic output was below its potential level.

In April, inflation fell to 3.7 per cent, the lowest since January 2013 while the shilling has held its own and appreciated by 2.8 per cent to the dollar this year to exchange at 100.60 units.

There, however, remain some risks of external shocks for the MPC to consider in its next meeting on May 28, chief among them the recent rise in the price of oil towards the $80 a barrel level, which has the potential of filtering through to Kenya’s inflation through higher energy, transport and food prices.

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