Rate Cuts Unlikely, Despite Low Inflation
BMI View: Although the Kenyan monetary authorities have the leeway to cut the central bank rate - currently at 9.50% - further during 2013 thanks to low inflation and a strengthening shilling, we believe that they are likely to hold rates steady during the year. This is mainly due to the fact that they will need to continue removing liquidity using the repo market and a cut to the CBR would limit their ability to do this. Instead, we think that there will be a focus on getting banks to pass on cuts already made.
Kenyan monetary policy makers are facing c onflicting pressures which make predicting the trajectory of monetary policy over the course of 2013 a difficult task . On one hand, still-benign inflation and a post-election rally for the Kenyan shilling ostensibly provide the leeway for the authorities to loosen policy . Such a course of action would give the economy - which already stands to benefit from a healthy macro climate and a boost to sentiment after the completion of the election - a further shot in the arm. Weighed against this however is the fact that the Central Bank of Kenya (CBK) continue s to soak up liquidity via the repo market indicating that there are some concerns about excess liquidity in the economy. Monetary loosening would exacerbate the source of these concerns. On balance, we believe that the authorities will adopt a wait-and-see approach and that ultimately there are unlikely to be further rate cuts in 2013.
|Room To Manoeuvre|
|Kenya - Headline Inflation, % y-o-y & Central Bank Rate, %|
Leeway To Cut
After spiking to 4.5% in February from 3.7% in January and 3.2% in December 2012, inflation fell to 4.1% in March. Although base effects and increasing demand on the back of strong economic growth are likely to see inflation trend higher over the coming months, we believe that the pace of the increase will be gradual. As the chart above illustrates, the real central bank rate (CBR) is firmly in positive territory ostensibly providing the monetary authorities with room to lower the rate further. Additionally, the Kenyan shilling has received a boost from the positive sentiment engendered by the completion of the electoral process and this will remove one of the major incentives for the authorities to continuing holding rates where they are.
|Kenya - Exchange Rate, KES/US$|
But Repo Market Provides Cause For Caution
However, despite the relatively benign inflationary picture and the strength of the Kenyan shilling, the authorities clearly remain concerned about excess liquidity - a fact demonstrated by their continued activity in the repo market. In the week ending April 5, KES4.9bn (US$58mn) was removed from the system via repos. As we have explained in the past (see online service 'Rate Cuts Unlikely For The Foreseeable Future' from March 26) , the CBR is the maximum rate that the authorities can offer in the repo market. Therefore, a cut to the CBR would lower the maximum rate that the authorities will be able to offer on the repo market, making participation in it less attractive. This could damage the CBK's ability to manage liquidity using the repo market.
|Repo Rates Remain Close To Maximum Lower|
|Kenya - CBR, Repo & 91-Day T-Bill Yield, %|
Another factor which might give the authorities reason to hold off from further easing stems from the fact that prior reductions to the CBR have yet to be fully passed on by banks to their customers. As the chart below illustrates, the spread between the CBR and the weighted average bank rate is hovering near six- year highs. This being the case, rather than cutting the CBR further, the authorities may focus their efforts on getting the banks to pass on reductions that have already been made.
|Pass It On|
|Kenya - Kenya - Policy & Commercial Bank Lending Rate, %|