BY LUKE MULUNDA
When the Central Bank Monetary Policy Committee (MPC) met on May 6 to review market developments, hopes were high for a quick fix to save the shilling from the dollar onslaught.
But, as it turned out, the committee left the shilling to be controlled by market forces, exposing the local unit to more battering which ended pushing it further down to 96 to the dollar by the time of going to press. The shilling’s slide has left markets jittery, with importers having to pay through the nose for goods, and setting the stage for a rise in commodity prices and, eventually, the cost of living.
But the committee, comprised of macro and micro-economic experts, concluded that there were no demand-driven threats to inflation and retained CBR at 8.50%, saying it will continue to monitor any emergent risks from the external and domestic economies that may impact on price stability.
“The recent developments in the global and domestic foreign exchange markets have triggered inflationary expectations and present a threat to the price stability objective of the CBK,” said Dr Haron Sirima, CBK deputy governor and vice-chairman of the MPC. “We will therefore pursue the current tightening bias stance in the money market through the CBK monetary policy operations in order to anchor inflationary expectations.”
The CBK does not have a governor currently after Prof Njuguna Ndung’u left in March after his term expired, and so the deputy chairs the MPC meetings. Recruitment of his successor is ongoing.
“Despite upward pressure from food prices attributed mainly to delayed rainfall, overall inflation remained within the government target range in March and April 2015,” Dr Sirima noted.
Overall month-on-month inflation rose from 6.31% in March 2015 to 7.08% in April 2015. The month-on-month food inflation rose significantly from 10.96% to 13.42%. The month-on-month non-food-non-fuel inflation rose slightly from 3.16% to 3.53% in the period. “The key monetary aggregates including the broad money supply and the credit growth to the private sector were within their respective non-inflationary targets, says CBK.
The exchange rate of the Kenya shilling against the US dollar came under pressure on account of a stronger US dollar in the global currency markets and an “enhanced but seasonal” demand for foreign exchange by the local corporate sector largely associated with dividend and profit remittances.
The Kenya shilling has displayed relatively less volatility since the start of 2015 compared with other major international and regional currencies, shedding 5% of its value. In addition, the local unit continues to be supported by sustained foreign exchange inflows through diaspora remittances averaging $121.38 million (about Sh10 billion) per month in the first quarter of 2015, and the lower petroleum product import bill attributed to the decline in international oil prices since mid-2014.
The MPC noted that the current value of the shilling to the US dollar had adjusted to the slight misalignment in line with fundamentals in the economy. “The Central Bank of Kenya level of usable foreign exchange reserves stood at $6,859.58 million (equivalent to 4.40 months of import cover) at the end of April 2015. This level of foreign exchange reserves coupled with the precautionary facility with the International Monetary Fund will cushion the foreign exchange market against any temporary shocks,” Dr Sirima said.
Short-term interest rates were aligned to the Central Bank Rate (CBR) while the monetary policy operations supported interbank market stability. However, liquidity conditions were tight in April 2015 on account of open market operations and the temporary build-up of government deposits at the CBK.
The government domestic borrowing programme for the Fiscal Year 2014/15 is consistent with the monetary policy objectives. Granted, domestic borrowing has not crowded-out private sector borrowing as often happens in a tight liquidity environment, which has reduced financing pressure on businesses and thus keeps the economy humming.
Latest data and stress tests show a strong banking sector. The CBK says it is working with stakeholders in the banking sector to implement measures aimed at enhancing transparency in the pricing of credit. Updated data from all commercial and microfinance banks show that new and existing loans amounting to Ksh825.85 billion had been converted to the Kenya Banks’ Reference Rate (KBRR) framework by end of April 2015 up from a revised level of Ksh707.34 billion by end of January 2015.
Commercial banks’ average lending rates thus declined gradually from 16.91% in July 2014 to 15.46% in March 2015, while the average deposit rate rose slightly from 6.59% to 6.63% over the period. Consequently, the average interest rate spread declined from 10.33% to 8.82%. This trend is expected to continue as more loans are issued under the KBRR framework, which is aimed at bringing down the cost of credit. While the interest rate spread still remains too wide for the comfort of most savers and borrowers, the drop signals a better future if the rate is consistently applied and enforced by the CBK and the Kenya Bankers’ Association.
The latest figures from the Kenya National Bureau of Statistics shows that overall real gross domestic product (GDP) growth was 5.1% in the fourth quarter of 2014, and the contribution of the financial and insurance sector remained strong. Notably, the sector grew by 10.3% in the fourth quarter of 2014 from 5.4% in a similar period of 2013.
Confidence in the economic prospects remains strong. The MPC Market Perception Survey conducted in April 2015 shows that a majority of the private sector firms remained optimistic for an improved business environment and stronger growth in 2015.
The global economy is projected to strengthen from 3.5% in 2015 to 3.8% in 2016, bolstered mainly by a stronger growth in the US and lower international oil prices. Strong global growth will trickle down through increased diaspora remittances, tourism inflows and more exports. The growth momentum for Kenya’s main trading partners is expected to remain resilient thereby benefiting exports and supporting exchange rate stability.
But market analysts say these measures offer a medium to long-term relief to the shilling and the attendant inflationary pressure. A short-term solution, they say, would be intervention to cushion the shilling by Central Bank of Kenya.
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