InsightsKenyaMacroeconomic updateMonetary Policy

7 August 2023

Kenya MPC Update: Interbank Strains Point To August MPC Pause

In brief

  • We expect a pause in the upcoming Central Bank of Kenya MPC meeting that is scheduled for this Wednesday 9 August 2023. The “out of calendar” meeting is a doubling down of the emergency MPC meeting that was held in late June; the first policy meeting under the new Governor Dr. Kamau Thugge.
  • With central banking psychology biased towards data dependency, we opine that the upcoming MPC meeting gives the policymakers two inflation data sets (June 2023 and July 2023) that were published following the June 2023 emergency MPC meeting.
  • Nevertheless, July 2023 inflation at 7.3% eased to target band (5.0% ± 2.5%) for the first time in 14-months. Core inflation decelerated 30bps m/m to 3.80% y/y, which should comfort the policymakers.
  • Inflation expectations into the MPC meeting remain de-anchored, exacerbated by the lifting of the conservatory orders that had suspended the implementation of the Finance Act 2023. Although the energy regulator had put into effect the doubling in the fuel VAT as contained in the Finance Act 2023 in its last two price reviews, Pavlovian conditioning signals some higher inflationary bias with the Court of Appeal giving its green light effecting the start of the revenue-raising law.
  • Recent developments in the KES interbank market strengthen our view of a neutral policy at the August 2023 MPC meeting. Overnight interbank rate jumped to 17.1% at the end of last week, with interbank spreads widening to 550bps (65bps ahead of the June 2023 emergency MPC meeting).
  • Whether the interbank stress has been induced by teething issues with the rolling of the new Central Securities Depository (CSD) system, or whether chaperoned by the CBK to enhance its monetary policy transmission channel, this sets the stage for a neutral policy stance to allow a more orderly interbank market correction.

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