CBK expected to cut base lending rate amidst uncertainty on policy results

The Central Bank of Kenya (CBK) is largely expected to cut its base lending rate further when the Monetary Policy Committee (MPC) meets on Wednesday.

Experts predict the reserve bank will cut rates by between 0.25 percent and 0.75 percent while keeping its last revision of the Cash Reserve Ratio (CRR) at 4.25 percent to support further market liquidity.

Doubts on the effectiveness of recent cuts to the base lending rate as credit risks rise from the Covid-19 pandemic crisis.

Researchers at Genghis Capital for instance say the MPC will be walking blindly into the Wednesday meeting as developments surrounding the global emergency remain highly fluid.

“The MPC meeting, unlike the previous one, will be flying less blind in regards to developments surrounding Covid-19. The pandemic presents a unique shock that hitherto projections are serving at best as rear-view mirrors. That said, we are of the view that the risks to economic growth are skewed to the downside,” noted the researchers.

With overall demand dented by the pandemic, further liquidity flooding is seen having little to no effect in a partially paralyzed economy.

Private sector credit growth is expected to ease in the aftermath of the slow output with banks tightening conditions for new loans issuance.

Data from March Purchasing Manager Index (PMI) by Stanbic Bank/IHS Markit showed private activity at its second lowest rate on record as Covid-19 containment measures put brakes on much of productivity.

“We maintain our view that monetary policy stimulus measures may not be effective in combating the effects emanating from the Covid-19 pandemic especially in some sectors such as tourism which have been hit by demand-side issues. We believe what businesses and the economy as a whole needs is financial relief,” notes Cytonn Research MPC note.

On March 23, the MPC elected to lower the base lending rate by one percent to 7.25 percent from 8.25 percent while revising the CRR for the first time in nearly a decade in efforts to salvage the economy and preventing the health crisis from growing into a fully blown financial meltdown.

Sterling Capital researchers however argue the move will have muted effects as banks remain wary of heightened credit risks.

“Sector non-performing loans (NPLs) stood at 12.7% in February 2020 compared to 12% in December 2019 and banks are wary about lending to the private sector under the current economic environment even with additional liquidity from the CRR revision,” they said.

Other concerns at the Wednesday policy meeting will stretch from narrowing fiscal space, inflation and the shilling depreciation.

Lower revenue projections for the year have seen the National Treasury revise its net domestic borrowing target to Ksh.404.4 billion from Ksh.300.3 billion through the second budget supplementary estimates to exert pressure on the domestic credit market.

Inflationary pressure is meanwhile expected to emanate from the prevailing locust invasion even as the decline in global oil prices offsets the pressure point.

Moreover, the Kenya shilling has remained under pressure having touched a new historical low Ksh. 107.32 against the US dollar last week as investors’ price in the expected hit on economic growth in 2020.