The Standard Chartered bank has recommended further cuts to the Central Bank Rate (CBR) to sustain momentum in Kenya’s economic recovery path in 2020.
The lender was taken by surprise at Monday’s cut on the CBR from 8.50 to 8.25 percent, It reckoned CBK can exercise further relaxation in policy to aid the recovery of momentum in private sector demand.
“We think the CBK will be able to offset pressure on growth by providing more stimulus in the very near term. We believe the CBK saw room to ease given subdued demand,” noted part of the report.
According to the lender, the prevailing macro-economic environment supports further cuts to the base lending rate with planned fiscal consolidation securing the brakes on past fiscal slippages.
This is as core inflation, for instance remains contained within targeted ranges with non-food-non-fuel (NFNF) inflation remaining below five percent indicating muted demand pressures and limited spillover effects from recent tax adjustments.
Further, the foreign exchange market has remained stable supported by the narrowing of the current account deficit and balanced flows.
The current account deficit narrowed to 4.6 percent of Gross Domestic Product (GDP) in 2019 from five percent in 2018 as imports fell from lower Standard Gauge Railway (SGR) related orders and stronger receipts from transport and tourism.
Moreover, CBK foreign exchange reserves have held steady at an equivalent 5.2 months of import cover retaining an adequate cover against short-term shocks in the foreign exchange market.
Meanwhile, the National Treasury has backed itself to deliver a lower fiscal deficit rated at 6.3 percent for the year based from its successive cuts to wasteful spending and improved revenue collection to December 2019.
While the translation of fiscal consolidation remains to be seen, Standard Chartered regional economist Razia Khan believes the CBK has leverage to cut rates further with private sector credit growth in mind.
“The big question mark will be on whether the private sector can regather its momentum,” she said.
Khan’s sentiments were backed by Eva Wanjiku, the Africa’s Strategist at the lender who believes the CBK can reciprocate Treasury’s fiscal consolidation drive.
“The CBK may need to do some heavy lifting in terms of supporting economic growth now that fiscal consolidation is a theme going into 2020,” she said.
