Rising crude oil prices, slow credit growth and interest rate caps might see MPC stop playing it safe.
The Central Bank of Kenya is this week expected to set the tone for Kenya’s economic direction in 2018 with the first meeting of the Monetary Policy Committee (MPC).
Coming from a year in which the MPC was largely predictable in its deliberate attempts not to destabilise interest rates while inflation and the shilling remained largely in secure territory, the markets will be keen to see what direction the committee makes of this year.
Although 2017 was a delicate year for Kenya’s economy, owing to a severe drought and prolonged electioneering, the MPC maintained its benchmark lending rate at 10 per cent every time it met.
Interest rate capping
While the committee attributed the decision not to adjust the rate to muted inflationary pressures in the economy, analysts reckon the introduction of interest rate capping in 2016 has greatly rendered MPC decisions ineffective.
The last time the MPC adjusted the Central Bank Rate (CBR) in November 2016 it cut the rate by 50 basis points from 10.5 per cent to 10 per cent.
In 2017, Kenya’s monetary indicators remained largely stable with inflation closing the year at 4.5 per cent in the month of December, which translated to a 55-month low and below the government’s preferred ceiling of 5 per cent.
The shilling held tight to the dollar trading at an average of Sh102 while the current account deficit did not exceed 6.5 per cent of gross domestic product.
Foreign reserves also remain way above the statutory requirement of four months of import cover at $7.094 billion in November an equivalent of 4.7 months cover.
Although the economy is expected to rebound and assume a growth trajectory, concerns over shrinking credit to the private sector, rising crude oil prices at the world market and projected strengthening of the dollar might force the MPC to rethink its tendency to play safe with the CBR.
Source of discomfort
“Interest rate capping has made it impossible for MPC to adjust the CBR and I don’t see the possibility of any significant deviation in 2018 although the fundamentals of the economy could necessitate adjustments,” said Churchill Ogutu, research analyst at Genghis Capital.
According to the World Bank, the decline in the private sector’s access to credit over the past three years has played a key role in recent slowdown in economic performance in Kenya. As of last August, private sector credit growth stood at 1.6 per cent of GDP, its lowest in over a decade.
“Improved access to credit requires lowering the cost of credit, removing the interest rate cap, the universal adoption of credit scoring and accelerating the collateral registry,” said the bank in its Kenya Economic Update December 2017 edition.
The outlook for strong credit growth remains dim given depressed demand and the rise in the number of non-performing loans. The need to stimulate private sector credit growth is a reality the MPC must confront despite the rate capping leaving little elbow room for manoeuvre.
While the credit squeeze to the private sector will remain a major headache for the MPC in 2018, managing inflation in a year when oil prices are on upward trend could prove to be another source of discomfort.
The impact of rising crude oil prices at the international market which hit a three-year high of $70 per barrel last week are already being felt in Kenya with the corresponding increase in fuel prices, something that is expected to trigger food inflation.
“The rising crude oil prices will definitely have an impact on inflation although this could be marginal,” said Timothy Waweru, managing director of Africa Research and Economic Development Consultants.
While improved weather conditions are expected to ensure food prices are stable, the end of the maize subsidy programme is already being felt as witnessed in the rising cost of maize flour from Ksh90 (0.86 US cents) to about Ksh200 ($1.92) per 2kg packet in less than a month, against the government’s prescribed retail price of $1.15.