The Central Bank of Kenya (CBK) has been urged to maintain its foot on the gas pedal and further tighten its monetary policy stance at the next top decision-making meeting that takes place on October 3rd, 2023.
The CBK last held its Monetary Policy Committee meeting on Wednesday, August 9, 2023, led by the CBK Governor and Monetary Policy Committee (MPC) Chairman Dr. Kamau Thugge.
According to a research note from the Kenya Bankers Association (KBA) lobby group, representing interests of the banking industry, while monthly inflation slowed in August, this trend could be reversed by a spike in fuel prices, further weakening Kenya Shilling and the damage the anticipated October-December El Nino rains on Kenya’s food basket.
The CBK monetary policy committee (MPC) has been a tightening mode since June 2022; raising the Central Bank Rate(CBK) from 7.5% to 10.5% over the period to early August 2023.
The implication of this has been an increase in money market yields and an increase in interbank market rates.
Banking sector average lending rates have also increased suggesting that the effects of the tight monetary policy continue to be felt in the credit market.
During the MPC meeting on 9th August 2023, the CBK introduced an interest rate corridor framework to guide monetary policy operations and market outcomes.
The corridor provided for targeting the interbank rate to oscillate within ± 250 basis points around the CBR, with the aim of enhancing the effectiveness of the bank’s policy.
This has since been achieved. However, there remain concerns about weaker transmission of the policy signal from the interbank market to other longer-term market interest rates, particularly the lending rates, that would otherwise effectively trigger the anticipated faster slowdown in credit supply.
In its research, KBA argues that new taxes and the Government’s fiscal consolidation plan could hike the cost of living and slow down the rate of economic growth as the last quarter of 2023 enters the final stretch.
The CBK’s current monetary policy tightening move has already raised the cost of funds and credit, therefore slowing down demand for credit.
The lobby also said Kenya’s external sector is highly exposed to global shocks and the effects of a tight monetary policy squeeze by developed markets continue to hurt Kenya’s economy as seen by a weakening local unit against other hard currencies.
KBA is thus pushing for further tightening of monetary policy to deal with inflationary pressure, slow credit demand and supply stem a built-up of non-performing loans, stabilize the Kenya Shilling exchange rate against the US dollar, and ensure macro-economic stability.
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