All eyes on CBK’s Monetary Policy Committee

January 11, 2012
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, NAIROBI, Kenya, Jan 11- Financial analysts are expressing divergent views on the outcome of the Monetary Policy Committee (MPC) meeting on Wednesday, which is expected to give guidance on the direction that interest rates will take this year.

While some project that during the meeting, which has been billed as an important event in the economic calendar for 2012, the Central Bank of Kenya (CBK)’s monetary arm is likely to hold the indicative base rate constant, others anticipate a further tightening of the policy stance.

“We expect the Central Bank of Kenya to maintain the Central Bank Rate (CBR) at 18 percent having tightened by an unexpectedly large 150bps (basis points) at its last meeting,” reckoned Standard Chartered Bank Head of Regional Research for Africa Razia Khan.

In its last meeting on December 1 2011, the MPC announced the 1.5 percent hike bringing the cumulative increases since October 2011 to 11 percent.

This tightening has had the desired effects of stabilising the exchange rate from an average low of Sh107 to the dollar in October 2011 to the current Sh87 against the greenback.

Subsequently, inflation in December 2011 eased and there are expectations that it will continue on its downward trend in January 2012.

While acknowledging that the positive impact on the twin problem of a volatile currency and soaring inflation could lead to the consensus view of a “neutral” stance, analysts from Genghis Capital however see the possibility of a ‘nominal’ hike of between 100 and 150 basis points.

Genghis Capital Research and Investment Analyst Evans Mugi however thinks that the decision will be largely informed by whether the CBK’s primary intention is to contain inflation or defend the local unit.

“If their mandate is price stability and if they factor in inflation, then if the Central Bank Rate is held steady then that’s well and good but if the CBK wants to send a strong message that they want to support the shilling and that they want the shilling to stabilise at this particular level, then the smart thing to do is to hike the interest rates,” he stressed.

He further held that relaxing the existing degree of monetary restraint would not be appropriate at this time as ‘inflationary pressures persist and inflation expectations remain un-anchored’.

“In the event that the CBR is held constant, then the assumption is that market players have built that into their trading position and you’ll probably see no effect on the exchange rate or on interest rates going forward,” he forecasted.

Should the MPC favour a hike, Mugi anticipates that most banks will not adjust their lending rates accordingly since they pledged in December last year to cushion borrowers in the wake of surging interest rates.

“Assuming they hold on to their word, the likely scenario is that even if there will be adjustments to the interest rates by commercial banks, then it will probably be the banks that have lagged behind or that have not hit the 22 to 24 percent ceiling,” the analyst opined.

A hike in the CBR would not only further drain the liquidity in the market but in effect push up the Treasury Bill rates as well as those of the fixed deposit.

But given that there are a lot of planned developments ranging from the general election to the implementation of the devolved system of government in 2012, most analysts project that volatility in both the exchange and interest rates regime will persist for the better part of the year.

As such Mugi predicts that cuts in the base lending rate can only be effected in the next three to four months or at least when CBK is convinced that the dis-inflationary trend has strengthened; non-food inflation has been contained.

Cuts can also be expected should the banking sector experience increased financial stress or if the eurozone crisis escalates to the level where it threatens global growth and that of the country.

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