High cost of living set to underline CBK’s policy rate meeting

The prevailing high cost of living is expected to underline Monday’s Monetary Policy Committee (MPC) meeting by the Central Bank of Kenya (CBK).

While the compounded effect of inflation has been clear, stakeholders in the financial sector are split on the direction to be taken by the reserve bank to contain the rising cost of living while sustaining the recovery of the economy.

According to the Kenya Bankers Association (KBA), a tighter monetary policy/raising the benchmark interest rate would help starve off the inflation drivers and offer stability.

“The potential persistence of higher food and fuel prices are likely to generate second-round effects on other commodity prices and fuel higher overall inflationary pressure in the near term,” KBA said in a research note.

“In our view, recognizing that monetary policy is a short-term macroeconomic stabilization tool, and to avert higher inflationary pressure and its consequent depressing effects on economic recovery, there is need to tighten monetary policy and via a raise in the policy rate.”

Inflation has continued to soar at the start of the year with the printing reaching a seven month high 6.47 per cent at the end of April with costlier food and fuel primarily driving up consumer prices.

Moreover, the Kenyan shilling has continued to depreciate against major world currencies and fell below the Ksh.116 mark against the US dollar earlier this month.

On a positive note however, private sector credit growth has been on resurgence to grow by the fastest rate in nearly six years to post the first double digit growth since before the advent of the interest rate caps in September 2016 (June 2016).

At the same time, the money markets have remained largely liquid with the inter-bank lending rate at 4.64 per cent as of Wednesday while official foreign currency reserves remain adequate.

Despite the cost pressures, analysts at Sterling Capital say the prevailing headwinds are not adequate enough to shift CBK’s policy rate at this time.

“We feel that the above developments will not be sufficient for a revision to the Central Bank Rate (CBR) and the Cash Reserve Ratio (CRR) which will remain at seven and 4.25 per cent respectively,” the analysts said in a research note.

The CBR has remained unchanged at seven per cent since May of 2020 while the last rate hike by the reserve bank came nearly seven years ago in July of 2015.

The Central Bank Rate tentative represents the risk-free lending rate and ideally informs the direction of interest rates to be charged by banks on customer loans.