CBK likely to retain base lending rate at 7%

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 June 25, the committee decided to reconvene within a month for an early assessment of the impact of the measures already in place, and the evolution of the COVID-19 pandemic.

In the last sitting, the MPC maintained the CBR at seven per cent, citing that the accommodative policy stance adopted in March, April and May sittings, which saw a cumulative 125bps cut was having the intended effects on the economy.

As the CBK’s decision committee meets, experts are of the view that the rate should be maintained, as cuts would lead to a further depreciation of the shilling thus reducing Kenya’s attractiveness as an investment destination.

According to Cyrus Mwale, an investment manager at a local agency, there is a lot of liquidity in the local market hence a cut on base lending rate will lead to an over the flood that could potentially push the shilling to the bottom.

Investment firm Cytonn, on the other hand, believes that additional rate cuts will not lead to private sector growth given the reduced economic activities in Kenya’s key sectors as well as the reduced lending by banks.

It added that the high liquidity in the money market especially given that the previous reduction in CRR ratio has not resulted in a significant increase in lending to the private sector. 

Furthermore, Cytonn managers are of the view that, given that one of the main goals of monetary policy is to ensure price stability, the stable inflation rate will not exert pressure on the MPC to implement inflationary control.

''The main goal of the monetary policy is to maintain price stability and support economic growth by controlling money supply in the economy. We expect the MPC to maintain the CBR at seven per cent,’ Cytonn said in its weekly update.