Kenya Bankers Association(KBA), a lobby group for Kenya’s Banking Industry, is urging the Central Bank of Kenya(CBK) to raise the policy rate when its Monetary Policy Committee(MPC) meets on Monday, 30th May 2022.
In a research note, KBA said the MPC should tighten monetary policy stance to rein in rising inflationary expectations and support market and macroeconomic stability in the near term.
KBA is advocating for tighter monetary policy stance
“As the MPC of the Central Bank of Kenya meets, the Committee would be weighing between supporting the fragile economic recovery and reigning in on rising inflation expectations,” said KBA.
Kenya’s monthly inflation rate has continued on an upward trend on account of rising oil and food prices as well as a weakening Shilling which has hiked the price of imports. The bankers’ lobby warns that factors driving higher inflationary expectations in the near-term are strong enough not to be ignored and should capture the attention of policy makers.
Rising fuel prices has a knock-on effect on prices of virtually all other commodities and sectors in Kenya.
KBA said Kenya’s economic recovery registered in 2021 is expected to moderate in 2022 due to poor weather conditions in the first quarter. This is especially so in bread-basket regions.
Kenya also faces depressing effects of higher fuel and imported commodity prices on manufacturing and other heavily energy-dependent sectors. KBA also warns that Kenya is also likely to be hit by seasonal depressed business activity associated with the general elections.
Credit growth is at risk of being constrained unless a transition to risk-based environment is achieved so that bank credit is priced to reflect risk conditions.
KBA warns that external sector imbalances are projected to worsen, exposing Kenya’s economy to global market environments. The implications on the domestic forex market is continued depreciation of the Kenya Shilling.
“We call upon MPC to consider tightening the monetary policy stance to rein in inflationary expectations and avert the destabilization effects of a further weakening of the Kenya Shilling on the macro economy.
The KBA brief mentions that while the current drivers of inflation are supply-side, persistently higher oil prices would knock-on other commodities and the second round effects would demand a stronger policy action to tame.