CBK set to cut support on inflation, weak Shilling
The continued rise
in the cost of living or inflation coupled with a weaker currency is now set to
see the Central Bank of Kenya (CBK) pull its support for the economy through
monetary policy.
For the former,
inflation has already breached the target range prescribed to the reserve bank
by the National Treasury of no more than 7.5 per cent.
Inflation in June stood
at a five-year high 7.9 per cent as food and fuel costs remained sticky going
into the second half of the year.
With the cost of
living having breached the set metric, CBK is now widely expected to take
measures to fight inflation including raising interest rates.
In its bi-annual
Monetary Policy Committee (MPC) report covering six months to April, the CBK
indicated the Central Bank Rate (CBR) remains the reserve’s bank primary tool
for monetary policy operations.
“The CBR remained
the base for monetary policy operations and its adjustments both in direction
and magnitude signalled the stance of monetary policy. The monetary policy
stance was operationalised through various instruments including open market
operations (OMO), changes in cash-reserve requirements at CBK and the CBK
standing facility/overnight discount window,” the CBK stated.
At the end of May,
the CBK lifted the benchmark lending rate or
CBR for the first time in seven years bringing the key lending rate up to 7.5
from seven per cent.
The CBK is now
widely expected to raise the benchmark lending rate further when it holds its
next MPC meeting on July 27.
Higher interest
rates will nevertheless represent the scaling back of policy measures affected
to support the economy after the advent of the COVID-19 pandemic.
For instance, the
CBK lowered the commercial banks cash reserve ratio to 4.25 from 5.25 per cent
releasing in excess of Ksh.32 billion to support bank lending/liquidity.
At the same time,
the reserve bank held its benchmark lending rate unchanged at seven per cent,
supporting cheaper borrowing from commercial banks.
“Interest rates
remained low and stable supported by the accommodative monetary policy and
improved liquidity conditions. Private sector credit growth continued to
strengthen, benefiting key sectors of the economy particularly transport and
communications, manufacturing, trade, business services, and consumer
durables,” added the CBK.
The monetary
measures taken to combat the fallout from the COVID-19 pandemic are now set for
reversal as the CBK moves to lift interest rates.
Analysts at ICEA
Lion Asset Managers nevertheless see costlier borrowing as the unintended
consequence of raising rates to attract foreign investments.
The analysts who
expect a 50 to 100 basis points hike to CBR later this month expects a higher
benchmark rate to encourage foreign direct investments (FDIs) in the country
and in turn improving the pool of hard currency to prop up a weakened Shilling.
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