Monday, March 19, 2018

Kenya cuts rate 50 bps, inflation expectations anchored

      Kenya's central bank surprised financial markets by cutting its Central Bank Rate (CBR) by 50 basis points to 9.50 percent, saying there was scope to ease its monetary policy stance to boost economic activity as inflation expectations are well anchored and economic output is below its potential level.
      It is the first rate cut by the Central Bank of Kenya (CBK) since September 2016 and the bank's monetary policy committee said it would closely monitor the impact of this cut along with changes to the global and domestic economy and "stands ready to take additional measures as necessary."
       CBK said the meeting by its policy committee was held "against a backdrop of sustained macroeconomic stability, improved weather conditions, increased optimism on the economic growth prospects, improvement in the business environment, and the continued strengthening of the global economy."
      Kenya's inflation rate has been decelerating steadily in the last 12 months and fell to 4.46 percent in February from 4.83 percent in January and a 2017-high of 11.7 percent last May.
      A fall in food prices outweighed a rise in fuel prices from higher global oil prices and CBK said it expects inflation to remain within the government's target of 5.0 percent, plus/minus 2.5 percentage points, in the near term.
      The committee's private sector market perception survey from this month showed inflation was expected to decline in the near term and growth expectations for 2018 were higher.
      The exchange rate of Kenya's shilling has been firming this year on improved investor sentiment, supported by a narrower current account deficit, with the central bank expecting the deficit to narrow further to 5.4 percent of Gross Domestic Product this year from 6.4 percent in 2017.
       The shilling was trading at 101.2 to the U.S. dollar today, up 1.9 percent since the start of 2018.
       Strong growth in the export of tea and horticulture, continued income from tourism and workers abroad, has also boosted Keny's foreign exchange reserves to an all-time high of US$8.832 billion from $7.089 billion in January. 
      Together with the recently extended precautionary arrangement of $989.8 million from the International Monetary Fund, this will provide the country with additional buffers against shocks.
       Last week the IMF approved Kenya's request for a 6-month extension of its stand-by arrangement so reviews can be completed by September, with the government committing to reduce its fiscal deficit and "substantially modifying interest controls."
       In September 2016 Kenya's government imposed a cap on banks' interest rates, despite objections by the IMF and banks, arguing that lenders were not passing on low rates to borrowers.
       But the cap of 4 percent above the CBK rate has essentially dented the pass-through effect of the central bank's policy decisions and private sector credit grew by only 2.1 percent in the 12 months to February, down from 2.4 percent in December.
       However, CBK added lending to manufacturing, real estate and trade sectors remained relatively strong, up by 13.1 percent, 8.3 percent and 5.9 percent, respectively.
       Kenya's  economy has been slowing in recent quarters and expanded by only 0.4 percent in the third quarter from the second quarter for annual growth of 4.4 percent, down from 5.0 percent.
       But the CBK's survey showed "almost unanimous optimism" by the private sector about 2018 based on a stable economic environment, favorable weather, confidence, continued public investment in infrastructure, expected direct flights to the U.S. and political stability.
       Uncertainties stem from U.S. trade policies, a resolution to the UK's trading relationship with the European Union and the pace of monetary policy normalization in advanced economies, CBK said.

      The Central Bank of Kenya released the following statement:
"The Monetary Policy Committee (MPC) met on March 19, 2018, to review the outcome of its policy decisions and recent economic developments. The meeting was held against a backdrop of sustained macroeconomic stability, improved weather conditions, increased optimism on the economic growth prospects, improvement in the business environment, and the continued strengthening of the global economy.
  •   Month-on-month overall inflation fell to 4.5 percent in February 2018 from 4.8 percent in January 2018, thereby remaining within the Government target range. This decline reflected lower food prices particularly for Irish potatoes, cabbages, and sugar. The decrease in food prices outweighed the increase in fuel prices as a result of the rise in international oil prices. Non-food-non-fuel (NFNF) inflation remained below 5 percent indicating that demand-driven inflationary pressures are muted. Overall inflation is expected to be within the Government target range in the near term mainly due to expectations of contained food prices following improved weather conditions.
  •   The foreign exchange market remains stable supported by a narrower current account deficit and improved investor confidence in the economy. The external current account deficit narrowed to 6.1 percent of GDP in the 12 months to January 2018 from 6.4 percent in 2017 reflecting strong performance in tea and horticultural exports, diaspora remittances, and tourism receipts. The deficit is expected to narrow further to 5.4 percent of GDP in 2018 supported by continued growth in tea and horticulture exports, resilient diaspora remittances, and continued growth in tourism receipts. Additionally, the impact of higher international oil prices in 2018 is expected to be moderated by lower food and SGR-related imports.
  •   The CBK foreign exchange reserves are at an all-time high of USD8,832 million (5.9 months of import cover), up from USD7,089 million (4.7 months of import cover) in January 2018, and continue to provide an adequate buffer against short term shocks in the foreign exchange market. The recently extended precautionary arrangement with the International Monetary Fund equivalent to USD989.8 million, will provide an additional buffer against exogenous shocks.
    •   Private sector credit grew by 2.1 percent in the 12 months to February 2018, slightly lower than the 2.4 percent in December 2017. The slowdown in credit growth was largely due to substantial loan repayments in the transport and communication sector. Nevertheless, lending to the manufacturing, real estate, and trade sectors remained relatively strong, growing by 13.1 percent, 8.3 percent, and 5.9 percent, respectively.
    •   The banking sector remains stable and resilient. Average commercial banks’ liquidity and capital adequacy ratios stood at 44.6 percent and 18.5 percent, respectively, in February 2018. The ratio of gross non-performing loans (NPLs) to gross loans increased to 11.4 percent in February 2018 from 10.6 percent in December 2017 largely due to increased NPLs in the manufacturing sector and loan repayments in the transport and communications sector.
    •   The MPC Private Sector Market Perception Survey conducted in March 2018 showed that inflation was expected to decline in the near term and reported stronger growth expectations for 2018. The Survey also showed almost unanimous optimism by the private sector for the domestic economic prospects in 2018. Respondents attributed their optimism to a stable macroeconomic environment, favourable weather conditions, improved business environment and investor confidence, continued public investment in infrastructure, expected direct flights to the U.S., and political stability.
    •   Global growth recovery is expected to continue in 2018, but uncertainties remain particularly with regard to the recent U.S. trade policy developments, the post- Brexit resolution, and the pace of monetary policy normalization in advanced economies.
      The MPC noted that inflation expectations were well anchored within the Government target range, the increased optimism for growth prospects in the economy, and that economic output was below its potential level. Therefore, it concluded that there was scope for easing its monetary policy stance in order to support economic activity. Consequently, while noting the risk of perverse outcomes, the Committee decided to reduce the Central Bank Rate (CBR) to 9.50 percent from 10.00 percent.
      The MPC will closely monitor the impact of this change in its policy stance. Other developments in the domestic and global economy will also be observed, and the MPC stands ready to take additional measures as necessary."


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