Lobby urge MPC to stay policy stance

The Kenya Bankers Association (KBA) has asked the Central Bank of Kenya (CBK) to maintain the current monetary policy stance, despite a slight easing of inflationary pressure.

KBA argues that lingering macroeconomic vulnerabilities in Kenya, including subdued global economic prospects, slowing domestic economic growth, and rising external sector risks, necessitate a more cautious approach to monetary policy.

The lobby group warns that a further rate hike could exacerbate credit risk and lead to a buildup in non-performing loans, which would have negative consequences for the stability of Kenya’s banking sector.

“With upside risks on inflation, a slowing down economy and continuing transmission of previous monetary policy actions, sustaining the current stance of monetary policy is justified, particularly on market stability considerations,” said KBA in its most recent research note released yesterday.

Five key pointers

The CBK Monetary Policy Committee (MPC) which is scheduled to meet on December 5, 2023, to discuss the appropriate monetary policy stance is expected to be informed by five key macroeconomic developments.

First, despite inflation remaining within the target range of 5± 2.5 per cent, it edged up in October to 6.9 per cent from 6.8 per cent in September, and 6.7 per cent in August 2023, reflecting imminent upside risks.

While global economic prospects are expected to remain dampened in 2023, better prospects are projected for 2024. On the domestic front, economic growth momentum is also easing on rising input costs and a slowdown in consumption spending.

The tight monetary policy stance adopted since mid-2022 continues to be transmitted through the market, with market interest rates steadily rising.

Private sector credit

Private sector credit growth – despite remaining strong at double digits — has decelerated in response to the rising interest rates and escalation in market credit risk that continue to call for a further tightening of credit standards by banks.

Lastly, Kenya’s external sector remains highly vulnerable to global shocks and policy measures taken by advanced markets aimed at curbing inflation.

In view of these macroeconomic developments, and considering a balance of risks associated with alternative policy actions, KBA says that sustaining the current monetary policy stance is justified.

KBA then wagers that a further rate hike would escalate credit risk in the market leading to a build-up in non-performing loans with detrimental effects on the industry’s stability.