Cytonn Note on the Monetary Policy Committee (MPC) Meeting for July 2017

The Monetary Policy Committee (MPC) is set to meet on Monday, 17th July 2017 to review the prevailing macro-economic conditions and give direction on the Central Bank Rate (CBR). In their previous meeting held in May 2017, the MPC maintained the CBR at 10.0% on account of (i) the foreign exchange market, which remained relatively stable, supported by a narrower current account deficit and high forex reserves, and (ii) the banking sector remaining resilient, with the average commercial banks liquidity ratio and capital adequacy ratio at 44.4% and 18.8%, respectively, while the gross NPL ratio for the sector declined slightly to 9.6% in April from 9.7% recorded in February. Inflation was projected to stabilize in the second half of the year due to the rainfall witnessed in the second quarter of 2017, albeit depressed, and government interventions, but the MPC noted that inflation would remain above the government target range of 2.5% – 7.5% due to the elevated food prices. GDP growth for the first quarter of the year came in at 4.7% due to a slow-down in the agriculture and financial services sector, and GDP growth for the year 2017 is expected to come in between 4.7% and 5.2%, mainly supported by ongoing heavy public investment in infrastructure. Despite this, there are still risks to economic growth brought about by (i) the slow-down in private sector credit growth that slumped to 3.3% in March, from 15.5% recorded the same time last year, (ii) the widening current account deficit, which expanded by 36.1% in March 2017 to USD 4.6 bn from USD 3.4 bn the same time last year, and (iii) uncertainty in the global market due to Brexit and changes expected to be brought about by the Trump administration.

Of the five factors that cytonn tracked, two have worsened from neutral to negative, two have remained neutral, while one has turned neutral from negative. This indicates that going by these factors, MPC should adopt a tightening monetary policy decision. However, looking at the trend in private sector credit growth, which is now at an 8-year low, and the slowdown in GDP growth, we expect that the MPC will hold the CBR at 10.0%, in order to support economic growth that came in at 4.7% in the first quarter of 2017 and is projected to be between 4.7% and 5.2% for the year 2017, lower than 5.8% in 2016.


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