NAIROBI, Kenya, July 22- Economists expect the Central Bank of Kenya (CBK) to further tighten the policy stance when the Monetary Policy Committee meets on Wednesday next week.
Standard Chartered Bank Head of Regional Research for Africa Razia Khan said on Friday they expect a hike of 50 basis points in the Central Bank Rate (CBR) which will present a clearer signal of the overall policy intent.
“We believe that only further policy tightening, albeit at a gradual pace, will successfully communicate this, making clear the policy stance of the authorities,” argued Ms Khan.
When the MPC met in May, the markets were disappointed when interest rates were raised by 25 basis points only to 6.25 percent which served to create an arbitrage opportunity especially since the 91-day Treasury bill yields were at nine percent.
This opportunity was exploited by banks which borrowed extensively and cheaply from the CBK’s Overnight Discount Window rate (at 6.25 percent) and invested in three months Tbills.
This put the shilling under pressure as it continued to depreciate at alarming rates.
To contain the situation, the Central Bank raised the overnight lending rate to eight percent while the CBR remained at 6.25 percent in a bid to seal that loophole through which banks were profiteering.
The institutions were warned against trading in funds obtained from the facility – which they use to meet temporary shortages of liquidity – and which the CBK vowed would be reviewed on a daily basis depending on the liquidity in the market.
The forex rate stabilised albeit in a few days but while this action was not supposed to lead to a rise in the cost of borrowing, this is exactly what happened and it caused confusion in the market.
More disarray was to follow two weeks later when the Central Bank reversed the overnight rate and imposed restrictions in its access, a move which was construed to mean a tightening of the policy.
A week later, the CBK stunned the market by injecting liquidity into the market through the one week reverse response to short-term pressure on interbank rates.
These actions reinforces the need for the Central Bank to make clear its intentions which Ms Khan reckoned can only be achieved through a change to the policy rate.
Taking such a position would also help to ease the inflationary pressures that have been creeping up since December last year.
“Headline inflation in Kenya, up to 14.5 percent year on year in June and likely to peak at over 16 percent year on year in our view requires more of a tightening response,” she emphasised.
“Although much of the impetus behind inflation has stemmed from higher food and fuel prices, with Kenya’s negative output gap still closing, there is little room for complacency,” she cautioned.