KenyaMacroeconomic updateMonetary Policy AnalysisStrategy

13 June 2022

Kenya’s May MPC: Follow Through to Allay FOMO Fears

In brief

  • The CBK delivered a surprise rate hike – the first in seven years – but there is a school of thought that the policy decision reflects FOMO. Whereas Kenya delivered a modest 50bps hike, the median hike by the central banks in our African coverage has been 100bps in their maiden hike decision.
  • But the apex bank would like the market to believe that it erred on caution and to arrest the inflation genie before it gets out of the bottle.
  • The market would like the CBK to fortify its credibility by addressing three key issues.
  • First, the market thinks the CBK has no informational advantage as to the inflation outlook. CBK needs to issue 2022 inflation projection, as it fully pivots into inflation targeting regime.
  • Secondly, although the rate hike is to signal tighter financial conditions, credit to the private sector has gathered momentum and is expected to continue. The operationalization of the Central Securities Depository should anchor interbank market with the policy rate and ensure effective transmission of the monetary policy via the credit channel.
  • Third, and the elephant in the room, is the FX shortage that has gained currency. Failure to address the FX concerns risks pass-through effect into headline inflation, unmooring inflationary expectations
  • We thus see a 6month long USD/KES Non-Deliverable Forward (NDF) trade quite attractive, unless the CBK addresses FX supply concerns. We think the upcoming 18-year infrastructure bond (auction date Wednesday 8 June 2022) will be priced at 13.5% levels, baking in the rate hike, but the on-the-run papers should adjust gradually in the medium term