Opinion divided on whether MPCs will revise Central Bank Rate

Tuesday, April 28th, 2020 00:00 |
Cash. Photo/File

Lewis Njoka @LewisNjoka

Analysts are divided over the Monetary Policy Committee’s (MPC) next course of action whenn it meets today to decide the monthly Central Bank Rate (CBR) and the Cash Reserve Ratio.

While some are predicting a further reduction in the CBR in view of Covid-19’s effects on the economy, others say they expect the rate to be retained at the current level since the economy is sufficiently liquid at the moment. 

Churchill Ogutu, the head of research at Genghis Capital, is of the view that policy makers will be defensive in today’s meeting, borrowing from countries that have experienced the pandemic longer than Kenya.

“We would like to look at monetary policy actions in the current environment as two-phased; play defense in the first phase to limit economic damage and stimulate in the second phase as the pandemic health risk dissipates,” he says.

Restrictive policy

“We are firmly entrenched in the first phase and as such, the current monetary policy stance may be deemed as restrictive.

Furthermore, the lack of fiscal space means that unorthodox monetary policy options are off the table.

Thus, we are of the view that the MPC meeting will reduce the benchmark CBR by 75 basis points to 6.5 per cent and retain the CRR at 4.25 per cent,” he added.

Reginald Kadzutu, a project head at Zamara Capital, however, says he does not foresee the committee changing the Cash Reserve Ratio or CBR saying effects of the last changes could take up to six months to be felt fully.

“I do not think there will be any change from what they did during the last meeting because there is normally a lag between making a policy and it filtering into the system.

Being only a month after the last cut, I do not think there is anything major that has changed which requires monetary intervention right now,” he said.

“Liquidity in the banks is more than sufficient. When you lower the rates, you want people to borrow to spend but with the Covid-19 our problem is not a liquidity problem, it is not a financial crisis, it is a complete hard stop of the economy.

So even if you drop the rate now to four per cent, what am I borrowing the money for?” he added.

During the last MPC meeting held on March 23, both the CBR and Cash Reserve Ratio were slashed by 100bps to 7.25 per cent and 4.25 per cent respectively.

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