Panic Reaction from the Monetary Policy Committee!
The panic reaction from the MPC has been set off by the public outcry that has followed the exchange rate crossing the psychological barrier of USD 1 = KES 100. The public outcry has led to the setting up of a task-force by the Prime Minister to advise on the exchange rate as well as a parliamentary enquiry into the causes of the decline in the Kenya Shilling.
The Central Bank of Kenya proposes to issue a new Infrastructure Bond IFB1/2011/12 on 3rd October 2011. This is the 5th Infrastructure Bond being issued by the CBK.
Overnight interest rates went on a roller coaster ride in August, rising from 6.7% on 10th August to a high of 28.40% on 26th August and then down below 6% by 9th September. In our last month's newsletter we had forecast that our Pessimistic scenario of interest rates was starting to play out and that the 91-day Treasury bill would rise to 11-12% in the next few months.
The Monetary Policy Committee (MPC) held a special meeting on 14th September 2011. The meeting had become necessary as the previous actions of the MPC this year had been largely ineffective, and the Central Bank of Kenya (CBK) had been forced to take a number of measures between the MPC meetings in order to stabilize markets.
The market was impacted by the uncertainty in global markets - the debt crisis in Greece and other European countries, the stand-off in the US regarding the debt ceiling and the downgrade of US Government debt by Standard & Poor. The NSE All Share Index fell to 76.14 on 25th August 2011, down 22.16% points from the beginning of the year and down 9.70% points from the beginning of the month.
In our July newsletter, we had given our opinion that the Monetary Policy Committee of the CBK should have increased the Central Bank Rate (CBR) in its July meeting, and that the appropriate rate was at least 8%, instead of leaving the rate unchanged at 6.25%. On 12th August, the Central Bank once again reverted to a tight monetary policy stance, just 2 weeks after indicating that they did not believe tight policy stance would have the desired result.
Interest Rates - Volatile Monetary Policy!
The Monetary Policy adopted by the Central Bank of Kenya (CBK) since January has been sending conflicting and contradictory signals. At the Monetary Policy Committee (MPC) meeting held on 27th July, the Central Bank Rate (CBR) was left unchanged at a level of 6.25%, much against market expectations of an increase of 0.25% to 0.50%. We have tabulated below the observations and the policy actions taken on the monetary policy front since January 2011.
In our previous newsletters, we have highlighted that the prices and yields of secondary market trades reported at the Nairobi Stock Exchange (NSE) are at artificial prices, and not reflective of the market, as a majority trades are taking place at grossly inflated prices.