Kenya – CBK To Make Slow Shift Towards Looser Policy


Friday, November 10, 2017 11:55 AM / BMI Research 

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Kenya's central bank will keep rates on hold at 10.0% over the coming months, before beginning a move towards looser monetary policy in H218. Although consumer price inflation will fall within the central bank's target range, we believe policymakers will nonetheless take a cautious approach to easing lending conditions until the impacts of a delayed election and lending rate cap are clarified 

Volatile inflation and the persistence of economic uncertainty will see the Central Bank of Kenya (CBK) adopt a cautious approach when resuming its slow cycle of monetary easing. Although inflation is likely to stabilise within the central bank's target range of 5.0% +/- 2.5% over the coming quarters, we believe the monetary policy committee (MPC) will look to keep rates on hold at 10.0% until H218, when we believe macroeconomic conditions will have settled.


As prices stabilise and uncertainty begins to pass, we believe the CBK will look to support lending conditions and economic growth with a 50 basis point (bps) cut to its key policy rate before 2019, and a further 50bps the following year.


Rate Cap And Election Impact Will Keep Bank Cautious

While the brief spike in inflation recorded in Q217 was largely transitory, we are confident the CBK will remain on cautious footing over the coming months while economic uncertainty over the result of the country's rescheduled election and cap on lending rates continues to play out.


At the time of writing, it remains unclear which candidate will win in the country's rescheduled presidential election. Although we believe a second vote will confirm President Uhuru Kenyatta's re-election (see 'Kenyatta Victory In Rescheduled Vote Is Most Likely Scenario', September 12), the likelihood of related violence could sustain the supply chain bottlenecks that contributed to the mild uptick in price growth over August, according to the MPC.


Uncertainty in the financial sector will also encourage a cautious approach to loosening monetary policy over the coming months. Credit growth amongst Kenya's commercial banks has seen consistent decline since mid-2015, cemented by a government-imposed cap on lending rates set at 4 percentage points above the central bank's policy rate in August 2016.


While there is increasing scope for the cap to be relaxed following the presidential vote (see 'Quick View: CBK To Remove Rate Cap In Months Ahead', September 14), this would depend on parliamentary approval. Moreover, the impact of the cap's removal on credit markets is uncertain, with potential for a sudden spike in credit issuance as banks can begin servicing pent up demand. In this environment, we believe the CBK will look to anchor demand for credit by keeping rates stable until the lending environment is more settled.


Loosening Will Resume In More Settled Economy

Eventually, we believe that the CBK will look to offer some stimulus to the economy, after a combination of poor harvests, political uncertainty, and low credit growth has weighed on economic activity in 2017. Although inflation has strayed above the central bank's target in recent months, reaching 11.7% in May 2017, the causes have been largely transitory and supply side-driven, with widespread drought driving up the cost of food – a key component of Kenya's consumer basket.


Going forward, we believe a relatively stable outlook for the Kenyan shilling and the likelihood of stronger harvests will help control inflation, averaging 6.7% and 6.6% in 2018 and 2019, respectively, compared to a projected 8.0% in 2017. This will provide the central bank with room to loosen monetary policy over the coming quarters, although we expect policymakers will continue to move slowly, as an apparent hawkish bias will likely discourage any substantial narrowing of real interest rates.  

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