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.