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There is still room for MPC to cut the Central Bank Rate, Cytonn Investments says

The main goal of monetary policy is to maintain price stability and support economic growth by controlling the money supply in the economy

The Monetary Policy Committee (MPC) is set to meet on Wednesday 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).

In their previous meeting held on December 5, 2024, the committee noted that they would closely monitor the impact of the policy measures taken, as well as developments in the global and domestic economy, and stood ready to reconvene earlier if necessary.

The main goal of monetary policy is to maintain price stability and support economic growth by controlling the money supply in the economy.

Analysts at Cytonn Investments say they expect the MPC, which is chaired by Central Bank Governor Dr Kamau Thugge, to cut the CBR by 50 basis points to 100 basis points to within a range of 10.25% – 10.75% with their decision mainly being supported by the need to support the economy by adopting a more accommodative policy that will ease financing activities and support private sector financing.

“Private sector credit contracted by 1.1% in November 2024, a further decline from 0.0% growth in October 2024. A rate cut would help unlock the private sector’s potential, enabling it to act as a key driver of economic recovery and sustained growth. Additionally, the business environment remains subdued, hence a cut in the CBR will help spur economic growth, increase money supply and improve business activities in the country,” Cytton’s January 2025 report says.

They also cite rate cuts by global giant economies as a factor that could influence the MPC.

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The European Central Bank announced a rate cut by 25 basis points to 2.75% on January 30, from 3.00% earlier in December 2024. Meanwhile, the US Federal Reserve decided to maintain their benchmark interest rate in their recent sitting on 29th January 2025 at 4.25%-4.50%, following the rate cut by 25.0 basis points to a range of 4.25%-4.50% in their December 2024 meeting from a range of 4.50%-4.75% in their November 2024 meeting.

“As such, we expect the MPC to follow through with this set precedence of loosening the monetary policy and cut the rate further,” Cytton says.

It also cites the continued stability of the Shilling against major currencies and anchored inflationary pressures, noting that despite the December rate cut in the CBR, there is still room for a moderate cut without reversing the Shilling’s stability.

“Since the last meeting, the Kenyan Shilling has appreciated marginally by 7.8 bps against the US Dollar to Kshs 129.2 as at 31st January 2024, from Kshs 129.3 recorded on 5th December 2024. The stability of the Shilling is expected to be supported by the stable foreign reserves which are currently at 4.5 months of import cover, above the statutory requirement of 4.0 months cover. Additionally, inflation has remained stable and below the mid-point of CBK’s preferred range, coming in at 3.3% in January.”

The Kenya Bankers Association (KBA) has already called for a rate cut, noting that analysis of the fundamentals reveals that although inflation falls within the recommended level what is now required is to ease food and fuel prices, and muted demand pressures in the economy.

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KBA says that so far, the elevated non-performing loan ratios continue to delay adjustments in lending rates consistent with risk-based credit pricing by banks, thereby constraining credit growth.

“Economic growth slowed to 4.0 per cent in the third quarter of 2024, weighed down by weaker growth in credit, dimmed positive sentiment, and global uncertainties during the period. However, prospects for a stronger recovery have emerged,” KBA noted.

The banking Association also noted that the exchange rate remains stable supported by a steady current account deficit anchored on robust remittances and inflows from tourism, and strong official foreign exchange reserves.

In view of these developments, and the growing need to reverse the deceleration in private sector credit, KBA therefore calls for a further cut in the CBR to provide additional impetus to the ongoing downward adjustments in the commercial banks’ lending rates.

 

 

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