Kenya’s Central Bank retains repo rate at 7%

Kenya’s Central Bank has opted to maintain the benchmark policy rate at 7% for the tenth consecutive time, aimed at supporting the recovery of an economy still reeling from the effects of the Covid-19 pandemic and escalating inflation. Churchill Ogutu, Head of Research at Genghis Capital, shed light on the factors influencing this decision. Despite the anticipation in the markets regarding the rate retention, the slow progress in the vaccination rollout, with only 2% of the adult population fully vaccinated, has underscored the challenges facing the country's economic revival. The uncertainty surrounding economic growth projections, compounded by the upcoming elections, has further clouded the outlook for both the current and upcoming fiscal years. The maintenance of the benchmark rate at 7% by policymakers two days ago was deemed necessary as a stabilizing measure amidst these uncertainties. However, the impact of this prolonged rate maintenance on lending rates in the long run has raised concerns. The disconnect between the benchmark rate and interbank rates could potentially lead to adverse effects on end consumers who perceive a lack of protection from commercial banks. Private sector credit growth fell short of the target, indicating a gap in credit extension to the most vulnerable segments of the economy. The central bank’s white paper on modernizing monetary policy aims to address this fragmentation in the interbank market, seeking to ensure a more cohesive and efficient transmission mechanism to market players. The proposed reforms intend to enhance the signaling effect of central bank rate adjustments, fostering a more stable and transparent financial environment. The liquidity dynamics in the banking sector pose additional challenges to credit extension, particularly for tier 2 and tier 3 consumers who form a significant portion of the banked population. Heightened uncertainty resulting from the pandemic, coupled with escalating government borrowing, limits the capacity of banks to extend credit to high-risk borrowers. Efforts to refine credit pricing models and transition to a more market-driven lending framework are underway but have yet to fully address the lending constraints faced by tier 2 and tier 3 banks. Notably, the stagnant growth in the export bill, hovering around 11.1% to 11.3% over the past few months, presents a notable hurdle in bolstering the country’s balance of payments position. Importation of essential intermediate goods, necessary for small-scale manufacturing, remains a key component of Kenya’s import bill. Additionally, being a net oil importer further adds to the country's economic challenges. To counter these obstacles, a comprehensive strategy that encompasses export diversification and domestic production incentives is imperative to enhance Kenya’s trade position and reduce reliance on imports. In conclusion, the Central Bank of Kenya’s decision to retain the repo rate at 7% reflects a measured approach to navigating the complex economic landscape characterized by pandemic-induced disruptions and inflationary pressures. The path forward will require concerted efforts to streamline credit access, enhance liquidity management, and stimulate export growth to fortify the country’s economic resilience and pave the way for sustainable recovery.