The MPC has maintained the CBR at 11.5 percent for the last five consecutive meetings on account of stability in the foreign exchange market, improvement in Forex reserves to about 4.5 months of import cover and a narrowing current account deficit.
According to Investments Manager at Cytonn Maurice Oduor there is a possibility the MPC may consider lowering the CBR by 50 bps to 11 percent given the favorable environment and positive factors since the beginning of the year.
Since January, the country has experienced a lot starting with the expectations of a high economic growth rate forecast by various institutions like the International Monetary Fund (IMF), as well as the stable forex trade and money markets.
“This could serve as a signal that the interest rates are attractive to the economy at the current levels, and would be in line with CBK Governor Patrick Njoroge’s earlier statement that MPC is working towards lowering rates, anchored by a stable currency and inflation rates,” she said.
However, she said, that the best move for the economy at this point would be for the MPC to maintain CBR at the current 11.5 for full stability of all the indicators.
“This would be the effects of lower interest rates, a stable shilling and low inflationary pressures to consolidate, and the economy to fully be anchored against any shocks in the near term,” she argues.
The principle mandate of the MPC is to formulate and implement monetary policy to achieve and maintain price stability in the country and help create a conducive environment for economic growth.
Price stability includes inflation levels, currency and interest rates which is achieved through regulating Central Bank Rate (CBR), which is the base for all monetary policy operations.
During periods of high inflation or a rapidly depreciating shilling, the MPC raises CBR to curb inflationary pressures and stabilise the shilling.
A higher CBR makes it more expensive for consumers to borrow to fund consumption and investment expenditure, which reduces liquidity, in turn reducing inflationary pressures. The opposite is true in a low inflation environment.
“The decisions of this MPC meeting are going to be key in shaping the monetary policy environment for the remaining part of the fiscal year 2015/16,” Oduor says.