MPC meeting may be at point to ‘hold rates steady’

By Steve UMIDHA

With inflation at multi-decade highs in many countries and pressures broadening beyond food and energy prices, policymakers have pivoted toward a rather relaxed policy.

But ahead of the Central bank’s Monetary Policy Committee (MPC) today, some financial analysts largely expect the apex bank to retain benchmark lending rate.

Should that happen, it will be a departure from June’s historic rate hike which economists said was meant to crush months of high inflation.

The monetary policy committee (MPC) raised its policy rate by 100 basis points to 10.5 percent in its previous sitting on June 26 after the new central bank governor Kamau Thugge called an unscheduled monetary policy meeting one week after he took office.

Governor Thugge’s sudden decision came after May inflation figures showed an unexpected increase, rising to 8 percent up from a ten-month low of 7.9 percent a month earlier and above market estimates of 7.53 percent.

But with a slowing inflation, economists now believe that Wednesday’s MPC meeting could see the government retain the current rates, with fears that additional hike in the CBR rate might curtail economic growth.

“We expect the MPC to maintain the Central Bank Rate (CBR) at the current rate of 10.50 percent, with their decision mainly supported by the ease in y/y inflation in July 2023 and the need to support the economy by adopting an accommodative policy that will support the private sector,” noted an analysis by investment firm Cytonn.

Kenya’s core inflation, which strips out volatile food and energy costs and is a better gauge of the underlying trend in prices, came in at 7.3 percent in July from 7.9 percent in June due to significant drop in prices of some food items and cooking gas, according to government figures.

The unexpected drop which also reached the central bank’s target range earlier than expected, came to fore despite an increase in taxes on gasoline that stoked transport costs.

“Based on the recent adjustments in the economic numbers and slowed political happenings, I can only see this go one way, the MPC to retain the current benchmark lending rate…I do not see why they should increase it when things are beginning to align, economically,” commented Peter Macharia, an economist and the CEO of Jijenge Credit.

The Central bank Governor said earlier this month, according to reporting by Bloomberg, he expects inflation to be back inside the target band of 2.5 percent to 7.5 percent by October.

Data by the Kenya National Bureau of Statistics (KNBS) indicate that this is the lowest year-on-year inflation since May 2022 when it stood at 7.1 percent.

Surprisingly, the country’s private sector activity fell during the month in question, undermined by slowing business in the services, wholesale and retail sectors in an environment of high inflation and weak consumer spending power.

During the week, Stanbic Bank released its monthly Purchasing Managers Index (PMI), highlighting that the index for the month of July 2023 came in at 45.5, down from 47.8 in June 2023, signaling a stronger downturn of the business environment at the start of Q3’2023.

The strong downturn is mainly attributable to the high cost of living amid rising fuel prices and the sustained depreciation of the Kenya shilling, which continues to wane.

It was the fifth month in a row that the PMI had stayed below 50, signaling a contraction in activity.

The Monetary Policy Committee (MPC) is meeting today Wednesday August 9 to review the outcome of its previous policy decisions and recent economic developments, and to decide on the direction of the Central Bank Rate (CBR).

Barring any abrupt change in the direction of recent economic data, the U.S. Federal Reserve may also be at the stage where it can leave interest rates where they are, Philadelphia Fed President Patrick Harker said on Tuesday.

“Absent any alarming new data between now and mid-September, I believe we may be at the point where we can be patient and hold rates steady and let the monetary policy actions we have taken do their work,” Harker said in remarks prepared for delivery at an event in Philadelphia.

Should it be appropriate to cease raising rates, Harker continued, “we will need to be there for a while. The pandemic taught us to never say never, but I do not foresee any likely circumstance for an immediate easing of the policy rate.”

Harker has a vote this year on the rate-setting Federal Open Market Committee and supported last month’s rate increase. His remarks are perhaps the strongest yet from a policy-voting Fed official to indicate an inclination against raising interest rates at the central bank’s Sept. 19-20 meeting.

Stable prices are a crucial prerequisite for sustained economic growth. With risks to the inflation outlook tilted to the upside, central banks must continue normalizing to prevent inflationary pressures from becoming entrenched. They need to act resolutely to bring inflation back to their target, avoiding a de-anchoring of inflation expectations that would damage credibility built over the past decades.

Monetary policy however, can’t resolve remaining pandemic-related bottlenecks in global supply chains and disruptions in commodities markets due to the war in Ukraine. It can however slow overall demand to address demand-related inflationary pressures, so a tightening of financial conditions is the goal.

The high uncertainty clouding the economic and inflation outlook hampers the ability of central banks to provide simple guidance about the future path of policy. But clear communication by central banks about the need to further tighten policy and steps required to control inflation is crucial to preserve credibility.

Clear communication is also critical to avoid a sharp, disorderly tightening of financial conditions that could interact with, and amplify, existing financial vulnerabilities, putting economic growth and financial stability at risk down the road.