Monday, January 28, 2019

Kenya holds rate, inflation anchored, growth strong

      Kenya's central bank kept its Central Bank Rate steady at 9.0 percent and reiterated its view from November that inflation expectations remain well anchored and the economy is operating close to its potential.
      The Central Bank of Kenya (CBK), which cut its rate twice last year by a total of 100 basis points, added this month's MPC private market survey also showed that near-term inflation expectations were lowered due to expected lower prices of food, fuel and electricity.
      The survey also revealed increased optimism of stronger growth this year than in 2018 due to a better investment climate, continued infrastructure development and implementation of President Uhuru Kenyatta's Big 4 projects to improve manufacturing, universal healthcare, affordable housing and food security.
      However, optimism was tempered by slow growth in private sector credit and concerns over slower global growth this year, CBK said.
      In the 12 months to December, private sector credit grew 2.4 percent, down from 3.0 percent in November, and CBK expects credit growth to strengthen this year.
      In September 2016 Kenya's government imposed a cap on bank's interest rates, despite objections by the International Monetary Fund and commercial banks, arguing lenders were not passing on low interest rates to borrowers.
      Earlier this month a lawmaker proposed raising this cap to 6 percentage points above the CBK rate from the current 4 points. In June 2018 lawmakers blocked the finance minister's attempt to repeal the cap, which he said had led to lower credit growth.
      After slowing in 2017, Kenya's economy expanded strongly last year, with gross domestic product up an annual 6.0 percent in the third quarter, compared with 4.7 percent in the same 2017 quarter, and CBK said strong growth had continued in the fourth quarter.
     "Growth is expected to remain strong in 2019, supported by agricultural production, a stable macroeconomic environment, and continued improvement in the business environment," CBK said.
     Kenya's inflation rate has been stable within the central bank's target range of 5.0 percent, plus/minus 2.5 percentage points, in recent months and is expected to decline in the near term due to lower oil prices, stable food prices and expectations of lower electricity prices.
     Headline inflation rose to 5.71 percent in December from 5.58 percent in November.
     After falling sharply last October and November following a report by the IMF that said Kenya's shilling was overvalued, the shilling has bounced back strongly and was trading at 100.73 to the U.S. dollar today, up 1.13 percent this year.
     CBK's governor, Patrick Njoroge, who worked at the IMF before becoming governor in 2015, dismissed the IMF's findings, saying it had used an inappropriate method for assessing the value of the shilling and the central bank lets financial markets drive the price of the currency and only intervenes to minimize volatility.

      The Central Bank of Kenya issued the following statement by its monetary policy committee:

"The Monetary Policy Committee (MPC) met on January 28, 2019, to review the outcome of its previous policy decisions and recent economic developments. The meeting was held against a backdrop of domestic macroeconomic stability, increased optimism on the economic growth prospects, lower international oil prices, and increased uncertainties and weaker global growth outlook.
  •   Month-on-month overall inflation remained stable within the target range in November and December 2018, largely due to lower food prices following favourable weather conditions, reduction in electricity tariffs, decline in fuel prices, and limited demand-driven inflationary pressures. Overall inflation was 5.7 percent in December compared to 5.6 percent in November. Non-food-non-fuel (NFNF) inflation remained below 5 percent, indicating that demand pressures in the economy were muted. Overall inflation is expected to decline in the near term, largely due to lower international oil prices, expectations of lower electricity prices following increased power generation from cheaper sources, and expected stability in food prices.

  •   The foreign exchange market has remained stable supported by balanced flows, and a narrowing in the current account deficit to 5.1 percent in the 12 months to November 2018 compared to 6.5 percent in November 2017. This narrowing reflects strong growth in diaspora remittances and tourism receipts, higher tea and horticultural exports, slower growth in imports due to lower food and SGRrelated equipment imports and the decline in international oil prices. The current account deficit is estimated at 5.2 percent of GDP in 2018, and is expected to narrow to 5.1 percent in 2019.

  •   The CBK foreign exchange reserves, which currently stand at USD8,131 million (5.3 months of import cover), continue to provide adequate cover and a buffer against short-term shocks in the foreign exchange market.

  •   Private sector credit grew by 2.4 percent in the 12 months to December 2018, compared to 3.0 percent in November, largely due to successful recovery efforts and loan repayments. Strong growth in private sector credit was observed in the following sectors: finance and insurance (17.5 percent); consumer durables (11.0 percent); business services (8.0 percent); and private households (6.8 percent). Private sector credit growth is expected to strengthen in 2019 relative to 2018, with the anticipated higher economic activity and easing credit risk.

  •   The banking sector remains stable and resilient. Average commercial banks’ liquidity andcapital adequacy ratios stood at 48.6 percent and 18.7 percent, respectively, in December 2018. The ratio of gross non-performing loans (NPLs) to gross loans fell to 12.0 percent in December from 12.3 percent in October, largely due to declines in NPLs following sustained recovery efforts by banks particularly in the trade, manufacturing, building and construction, and transport and communications sectors.

    •   The economy picked up strongly in 2018, with data for the third quarter showing that real GDP growth accelerated to 6.0 percent in the first three quarters of 2018 from 4.7 percent in a similar period in 2017. An assessment of available indicators of economic activity showed that the strong growth continued into the fourth quarter of 2018. This improved performance reflected higher agricultural production, the continued recovery of the manufacturing sector, and the buoyant services sector, particularly trade, information and communication, accommodation and restaurants, transport and storage, and real estate. Micro, Small and Medium-Scale Enterprises (MSMEs) remained resilient in 2018 and are expected to support growth in 2019, to the extent that their constraints, including access to finance, are alleviated. Growth is expected to remain strong in 2019, supported by agricultural production, a stable macroeconomic environment, and continued improvement in the business environment. Additionally, the alignment of Government spending to the Big 4 priority sectors is expected to boost economic activity in manufacturing, agriculture, construction and real estate, and health sectors.

    •   The MPC Private Sector Market Perception Survey conducted in January 2019 indicated that inflation expectations were well anchored within the target range, with respondents revising their inflation expectations for the near term downwards on account of expected lower prices of food, fuel and electricity. The Survey also revealed increased optimism that economic growth would be stronger in 2019 due to, among other factors, a better investment climate, continued infrastructure development, and implementation of the Big 4 projects by the Government. Expectations of increased agricultural production, the continuing decline in international oil prices, a stable macroeconomic environment and strong tourism performance also contributed to the strong positive sentiment. Nevertheless, the optimism was tempered by the slow growth in private sector credit, and concerns of a likely slowdown in global growth in 2019.

    •   Global growth is expected to weaken in 2019, with increased uncertainties with regard to the trade tensions between the U.S. and China, Brexit negotiations, slowdown of the Chinese economy, the partial shutdown of the U.S. government, and the pace of normalization of monetary policy in the advanced economies. These developments could lead to higher volatility in the global financial markets.

      The Committee noted that inflation expectations remained well anchored within the target range, and that the economy was operating close to its potential. The MPC concluded that the current policy stance remains appropriate, and will continue to monitor any perverse response to its previous decisions. The Committee therefore decided to retain the CBR at 9.00 percent.

      The MPC will continue to closely monitor developments in the global and domestic economy and stands ready to take additional measures as necessary."


Post a Comment