Chances of a rate cut by Kenya’s Monetary Policy Committee on Nov.25 is high following the repeal of the cap in November.
Analysts from Global Markets Research of NCBA Group PLC and Genghis Capital are of the view that markets are now pricing in a probability of a rate cut at the next monetary policy committee (MPC) meeting being shaped by the key macro-economic indicators.
Both projects the MPC may cut rates by 50-100bps in its next sitting.
“We expect an accommodative policy stance (50bps cut to 8.5%),” says Genghis Capital in their MPC Outlook Note, November 2019.
“The MPC action notwithstanding, we believe that the repeal of interest rate caps by far remains the biggest stimulus to credit,” noted the Global Markets Research, NCBA Weekly Fixed Income Report.
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Genghis Capital says besides the repealed interest caps, the macroeconomic environment is similar to the last rate cut ‘coupled with the fact that there is a wave of global stimulus on the back of a slowdown in global growth, which are both factors that lean towards a rate cut and strengthen a case for a dovish stance’.
Both agree that at 4.9% and 2.6%, headline and core inflation remain well within the statutory target band.
Moreover, the Kenyan currency has remained bullish appreciating by 1.9% to 101.85 against the US dollar on the back of an improved current account position and sound foreign exchange reserves.
“The forex reserves present an adequate cushion for the local unit in the short term and have been relatively sturdy as highlighted by the normalized reserves,” says Genghis Capital.
On the other hand, besides improvement in economic sentiment due to increased optimism about access to credit, the Global Markets Research team says, “However, whereas economic prospects have remained upbeat, growth remains below the country’s estimated 6.0% potential. The gap may widen further should the government stick to the envisaged fiscal consolidation path.”
The committee last met on September 23 rd 2019 and maintained the CBR at 9.0%, citing a stable macroeconomic environment. Further, the committee noted that the prospective tightening of fiscal policy on the domestic front alluded to an accommodative monetary stance in the near term.