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The Central Bank of Kenya(CBK) is expected to retain the key policy rate at 7% when its top decision-making organ, the Monetary Policy Committee(MPC), holds its session this Wednesday, 26th May 2021.
The MPC will be leaving the CBR at 7% for the 10th consecutive time, having it from 7.25% in March 2020.
Analysts attribute this neutral policy stance to stable inflation that is within the CBK range of 2.5%-7.5%, meaning that the MPC is not under pressure to maintain price stability.
The April 2021 monthly inflation rate slowed to 5.8% compared to 5.9% in March 2021 despite a rise in the price of crude oil on the international market.
Any additional cuts in the CBR is also expected to lead to a rise in private sector credit growth, which dipped to 7.1% in March 2021 from 9.7% in February 2021.
Why CBK will retain the policy rate
According to a Weekly Research bulletin by Genghis Capital, the CBK is likely to retain the Central Bank Rate(CBR) at the current rate in this upcoming meeting, based on feedback from respondents in the March 2021 MPC CEO Survey.
” Most respondents in this survey indicate they expect input costs to dial up this quarter on account of COVID-19 uncertainities while majority expect neutral impact on the output cost,” said the Genghis Capital Research Notes.
Further, the Purchasing Managers Index(PMI) declined to an 11-month low of 41.5 in April, signalling a contraction in business sentiment.
Private sector credit growth shrunk to 7.7% in March 2021 compared to 9.7% in February 2021. As indicated in the March 2021 CBK Credit Officer Survey, most respondents expect the portfolio of non-performing loans to rise during the quarter.
” As such, we do not expect healthy clip in credit mediation in the near term,” said analysts at Genghis.
But not all experts agree with the ability of Central Bank of Kenya to use the CBR as a tool to stimulate the economy.
” The CBK has no effective transmission mechanism and so adjusting the CBR is an exercise in futility. One of the roles of CBK is to maintain the level of inflation. Unfortunately, the current inflationary pressure is cost-push which again CBK has no tools to deal with,” said Reginald Kadzutu, finance and economic analyst and Acting CEO Amana Capital.
In the 2021/22 Budget, KSh 26.6 Billion has been set aside to implement a post-COVID-19 recovery plan, with KSh 8 Billion to provide liquidity to businesses.
The budgetary support to COVID-19 hit firms may have eased pressure on the MPC to take any additional measures to stimulate the economy.
ALSO READ: Kenya Maintains Key Interest Rate at 7% for the Eighth Time
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