In brief
- The Central Bank of Kenya (CBK) delivered a higher-than-expected rate hike (75bps -vs- 25bps consensus) at its March 2023 monetary policy committee meeting, taking the policy rate to 9.50%. Belatedly, the policy rate is now ahead of the (ex-post) inflation (Feb-2023: 9.2%).
- The CBK acknowledged that Feb-2023 inflation surprised to the upside (+180bps), mainly driven by the vegetable segment in the food inflation. Although the reaction function is blunt to address the supply-induced inflationary shocks, the MPC emphasized its intent to prevent second-round effects entrenching.
- We expect FX convertibility risk to abate in the near-term. Anecdotal evidence suggests that the FX interbank market has been reactivated, leading to a narrowing between the commercial banks’ executed USD rate and the CBK official rate.
- Although the external FX buffer of USD 6.6bn – equivalent to 3.7months of import cover – is a concern, we are bullish on its near-term outlook. We estimate FX reserves at USD 7.9bn (c. 4.5months of import cover) at the end of FY23, bolstered by financing inflows.
- As monetary policy normally acts with ‘long and variable lags’, we thus expect the 75bps rate hike to slowdown 1Q2023 growth prospects. The previous monetary policy effects (cumulative 125bps in tightening) have started creeping in with private sector credit growth at 11.7% y/y (February 2023); 100bps below the 1Q2023 target
- Domestic borrowing in FY23 is trailing the curve with 67.8% (KES 295.0bn in aggregate terms) achieved hitherto, implying investors will demand a term premium at the remaining primary bond auctions. Coupled with the higher inflationary expectations, this should dial upwards rates in 2Q2023.
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