In brief
- The Central Bank of Kenya delivered a surprise 200bps rate hike in its December 2023 MPC meeting, taking the CBR to 12.5%. With November 2023 inflation coming in at 6.8%, within the target band of 5.0% ± 2.5%, the policymakers cited FX pressure as major risk to its inflation outlook.
- The hike was surprising against the backdrop of neutral policy stance in the previous two MPC meetings that were held in August and October 2023. Put differently, what does a 200bps rate hike achieve in December 2023 that 100bps successive rate hikes in August and October 2023, or any other iteration, was unable to achieve?
- The CBK attributed 3.0pp of the November 2023 inflation to FX passthrough. We are of the view that the CBK used fuel inflation as a proxy for the FX passthrough as the sub-index contributed 2.9pp to the month’s inflation. Electricity prices and regulated fuel pump prices, which went up by an average 40.0% y/y and 28.8% y/y, respectively, cements our view.
- Our general feeling is that the Governor did not communicate clearly on the targeted ‘fair value’ of KES. Granted that central bankers adopt Fedspeak as their preferred communication, this oversight left us with many questions. Is CBK telegraphing that as KES hit its ‘fair value’, the apex bank was not able to anchor KES at this level due to dwindling FX reserves? What does a 200bps achieve in restoring exchange rate stability that other instruments have failed to achieve?
- We believe the triggering of the monetary policy consultation clause (MPCC) is the proximate cause of the rate hike in the latest MPC meeting (and the June 2023 MPC meeting). With average inflation in 2Q2023 at 7.9% and above the upper range of 7.5%, the MPCC was triggered with the jumbo rate hike as a remedial measure. This is the second MPCC trigger in the current IMF programme, the previous one was triggered with the inflation average of 9.4% in 4Q2022.
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