In a special meeting on Wednesday, the MPC raised the CBR from 6.25 percent to seven percent, a move that Standard Chartered Head of Regional Research for Africa Razia Khan interprets to mean a willingness by the Central Bank of Kenya (CBK) to act.
“Although there had been much talk of the market expecting even more in the way of tightening, we think the market will react overwhelmingly favourably to this decision,” she emphasised.
CBK has in recent months come under fire for its reluctance to take bold actions that could help rein in the shilling which has been on a free fall touching all-time lows of Sh95.65 to the dollar last week.
The market has been demanding signals that could restore confidence in the markets but this has not been forthcoming.
However, Khan explained that Wednesday’s statement from the CBK which sought to explain the developments in the economy against which the committee was basing its decisions on, would hopefully give directions to the market.
“The key here is not just the extent of tightening, but the broader backdrop explaining the basis for current and future interest rate decisions,” the economist added.
The highlighted developments included the fact that oil prices seem to be on the decline as are food prices which might come down on the back of improved weather conditions.
Should this happen then, the inflationary pressures are expected to ease and this could also be reflected in the exchange rate. Additional measures will however be need to reverse the trend on the currency and support it so that it can stabilise.
“This is important as it will underscore to markets the authorities’ willingness to take action when needed. The ability of monetary policy to impact exogenous shocks such as food prices was always in doubt – as the CBK rightly points out – but the statement makes it clear that policy will in the future react to what it can influence. This should help boost market confidence going forward,” Khan offered.
In it’s statement, the CBK admitted that it flattered particularly when it came to the overnight discount window rate resulting in confusion regarding the use of the rate as a signal of monetary policy.
“The Committee noted that some of its earlier reactions to the crisis had failed to deliver stability and that they were even interpreted adversely. The market reactions were equally perverse,” read the statement from the MPC Chairman Prof Njuguna Ndung’u.
However, the committee was quick to assure that this would be corrected in future policy decisions, with clearer guidelines issued.
“This re-introduces a much needed level of predictability into policymaking, and should be welcomed by all participants,” Khan commented.
Further the forex rate can expect some support from the issued infrastructure bond targeting the Diaspora, financing from the International Monetary Fund and the possibility of floating a Eurobond.
For a team that was accused of flattering and issuing half-hearted policy stances, the economist seemed to give a thumps up saying that this time round, the decisions arrived at were a clear signal to the market.
“The move is more measured than it is panicked – there is plenty more to the statement than the policy decision alone. Market participants would do well to read that closely,” she summed up her observations.