- Last month, the banking regulator retained the base lending rate at 9.5 per cent on easing inflation.
- The cost of living has held above the government's ceiling of 7.5 per cent since July last year.
Image: ENOS TECHE
The new Central Bank of Kenya's governor Kamau Thugge will this morning host his inaugural Monetary Policy Committee (MPC) amid concerns about the depreciating shilling.
Last week, Thugge, a former principal secretary at the National Treasury took over from Patrick Njoroge to become Kenya's 10th CBK governor.
On Friday, the local currency closed the market at 140.31 units against the US dollar, having dropped almost 20 per cent in the past 12 months.
In a surprise tweet, the apex bank which hosts the MPC every after two months called for today's (Monday) meeting, sparking speculations amongst industry players.
"The Monetary Policy Committee will hold its meeting on Monday, June 26, 2023,'' the tweet posted Friday evening reads.
Last month, the banking regulator retained the base lending rate at 9.5 per cent on easing inflation.
The abrupt meeting has sparked curiosity amongst market analysts with some predicting a possible cut on the bank's anchor rate in view of impending inflation should President William Ruto signs the Finance Bill, 2023 into law.
"This comes as a surprise but it is the right thing to do. The shilling continues to drop despite several interventions. The possibility of a presidential assent on the Finance Bill which doubles VAT of petroleum products is also a worry,'' Triangle Capital's chief finance lead Bellamy Buyole told the Star.
He stressed the impact of the current forex crisis in the country, with importers struggling to consolidate enough dollars to import goods.
"Traders are buying US dollars at a high of Sh148 in the parallel market as banks hoard. This is likely to be top on the agenda,'' he said.
His sentiments are echoed by financial market analyst Barrack Obonyo who believes the meeting has come at the right time.
"We have a new boss at CBK. The previous regime rolled out several initiatives to rescue the shilling but failed. I expect Kamau Thugge to present a different strategy,'' Obonyo said.
He added that besides the shilling, the MPC is likely to evaluate geopolitics in view of the recent crisis in Russia. Obonyo did not rule out talks about the Finance Bill, 2023.
They all project the MPC to raise the base lending rate by at least 50 basis points as a double bullet in the fight to cut the cost of living as well as prevent saturation of the local currency in the market.
By lifting the benchmark lending rate, the CBK seeks to stamp on inflation by going after demand while at the same time incentivizing investments in Shilling denominated assets after significant portfolio outflows triggered by interest hikes in developed economies.
In May, inflation rose to eight per cent year-on-year from 7.9 per cent in the previous month. On a monthly basis, May inflation was at 0.9 per cent compared to 0.5 per cent in April.
The cost of living has held above the government's ceiling of 7.5 per cent since July last year despite several CBR hikes, with the latest being in March when CBK raised it from 8.75 per cent to 9.5 per cent.
Continued weakening of the shilling makes imports costlier and piles pressure on the cost of living due to the country’s reliance on foreign markets for essential supplies such as fuel and materials for factories.
Consumers are already feeling the impact of the depreciating shilling after purchasing prices rose the fastest in more than half a year in May.
Firms polled in the composite Purchasing Managers Index (PMI) linked the increased consumer prices partly to the weakening shilling, which pushed up input prices at the sharpest pace since January 2014.
“Input prices are now at their highest since the survey began in 2014 as the shilling depreciated further, which increased import costs,” Mulalo Madula, an economist with Stanbic Bank said.
The shilling continues to drop despite stability in the country's Forex reserves.
According to the latest CBK weekly bulletin, usable foreign exchange reserves remained adequate at $7.37 billion, (4.06 months of import cover) as of June 22.
This meets the CBK’s statutory requirement to endeavor to maintain at least 4 months of import cover but fell short of meeting the East Africa Community's threshold of 4.5 months of import cover.