CBK to leave the benchmark rate unchanged at 7 per cent

The Central Bank of Kenya (CBK) is expected to largely retain the benchmark lending rate at seven per cent for most of 2021.

The reserve bank whose Monetary Policy Committee (MPC) meets for the first time this year on Wednesday is seen keeping an open stance in its support for local economic rebound.

With other remedies to cushion the economy including relief on credit bureau listings and customer loan restructures lapsing, CBK’s monetary stance is seen as the only card left to play according to financial analysts.

“There is a need to support the economy by continuously pumping money in the economy. The current macro and business environment fundamentals might however constrain the transmission of further accommodative cuts despite the need to stimulate economic growth,” said analysts at Cytonn Investment.

CBK’s likely policy direction is further seen finding anchoring from the containment of inflation pressure from subdued demand pressure with inflation having averaged 5.2 per cent across 2020 keeping within the government’s target range.

“Oil prices have been on the rise, and this together with the weakening Kenyan shilling is likely to increase inflationary pressure. Despite the rise in inflation we expect a retention of the central bank rate (CBR) at seven per cent,” stated analysts at Sterling Capital.

In November last year, the CBK left the benchmark rate unchanged for the fifth straight time noting previous adjustments were still having their desired effects.

The reserve bank has also left the cash reserve ratio (CRR) at a lower 4.25 per cent since March to support further private sector funding.

Private sector credit growth which stood at 8.2 per cent in November is expected to find further impetus from initiatives such as the SME Credit Guarantee Scheme which however faces execution risks.

On their part, commercial banks have extended CBK gains to customers having for instance restructured payments of Ksh.1.38 trillion in customer loans by the end of October.

The financial markets are expected to remain liquid over the near term supported in part by heavy domestic debt redemptions by government to investors.

The commercial banks are however expected to remain under evolving credit risks which already stand elevated with the sectors non-performing loans standing at 13.6 per cent in October.

“The banking sector may struggle with the restructured loan book. While majority of the restructured loan book are still considered as normal loans, a chunk of this may turn out as non-performing on slower post pandemic recovery and cash-flow challenges,” Genghis Capital noted in its 2021 playbook.