Kenya: Central Bank keeps rate unchanged in January
January 27, 2021
At its 27 January meeting, the Monetary Policy Committee of Kenya’s Central Bank opted to keep the Central Bank rate unchanged at 7.00%, marking the sixth consecutive hold after having cut it by 125 basis points during March–April 2020.
The decision to hold reflected the Bank’s assessment that the policies implemented since March 2020 have been sufficient to weather the economic impact of the health crisis. Moreover, the Bank noted that policies are supported by the implementation of the FY 2020–2021 budget, including “the Economic Stimulus Programme to cushion vulnerable citizens and businesses from the adverse effects of the pandemic”. The decision was also backed by analysis from leading economic indicators, which point to a continued recovery in the fourth quarter, after the contraction in GDP softened notably in the third quarter. Lastly, the Bank expects inflation to remain well within the 2.5%–7.5% target band in the short term on lower prices for food and as demand remains muted. The Bank also added that the “recently-introduced tax measures are expected to have a modest impact on overall inflation”.
In terms of future guidance, the Bank stated that it “stands ready to take additional measures as necessary”. The tone, similar to previous communiqués, suggested that further policy moves will be highly dependent on how the elevated uncertainty regarding the Covid-19 pandemic and the emergence of new variants of the virus resolves.
Commenting on potential further monetary policy easing, analysts at JPMorgan noted:
“The Central Bank of Kenya (CBK) could consider a cut in the policy rate at midyear, when it should be more confident in the benign inflation outlook. The shilling exchange rate movements will remain a paramount consideration given the depreciation last year. The drag on tourism (Kenya’s key source of export receipts) from COVID-19-induced restrictions contributed to depreciation pressure on the shilling. We note that the CBK will still be able to smooth any short-term exchange rate volatility […] if the currency comes under severe and sustained pressure.
The next meeting is scheduled to take place on 29 March.
Author: Marta Casanovas , Junior Economist