The Central Bank of Kenya (CBK) has expressed optimism that the country’s underlying inflation, which stands at 7.6%, will slide downwards as the year progresses, due to easing oil prices.
The bank has also retained its baseline lending rate to domestic banks as a lender of last resort at 9%, after considering the effects of the past initial public offers (IPOs) in the Nairobi Stock Exchange (NSE).
CBK Governor Njuguna Ndung’u said on Monday the bank was monitoring the final movement of the proceeds of the government’s divestiture from telecommunication firm Safaricom, after the IPO.
The Central Bank also revealed it secretly battled with liquidity woes following the IPO, forcing it to take what it termed as “bold pre-emptive actions” to cushion the financial sector from the instability that might have arisen from the significant movements of money from the banking system.
CBK plans to shift the war from battling liquidity arising from the series of IPOs that dominated the capital markets to taming inflation, which currently stands at 7.6 percent, against its target of below 5 percent.
Prof. Ndung’u has termed as ‘unacceptable,’ the continued rise in inflation.
The bank has, however, expressed optimism that the effect of high inflation was likely to subside as the global price of crude oil eases to US$120 a barrel.
The government released 25 percent of its majority stakes from Safaricom – equivalent of 10 billion shares – which it sold at Ksh50 billion to raise funds for infrastructure improvements in a transaction which appears to have put the CBK into an overdrive.
The CBK said the IPO drove activity within the financial markets to almost abnormal levels, leading to a 30 percent increase in bank lending to the private sector, much higher than the liquidity level that the bank is used to, under normal circumstances.
As the funds head to the government coffers, the CBK is predicting the commercial banks will suffer from lower liquidity demand in the short-run, in terms of lending to the government, before the money begins to make its return to the market.
This is the stage the bank is awaiting for further intervention.
“The bank will continue to carefully monitor the redistribution of liquidity and consequential access to domestic credit as the activities in the money and capital market returns to normalcy,” the bank Governor said.
Prof. Ndung’u revealed the local currency, the Shilling, strengthened as a result of the announcement by the Treasury that foreign investors were to be allowed to participate in the IPO.
In his comprehensive statement after last week’s meeting of the Monetary Policy Committee, the CBK Governor said the strengthening of the shilling had been expected as a result of the foreign currency inflows that came in with the IPO.
“These inflows, following the allocation of shares, appear to have left the country either as refunds or through profit-taking. As a result, the exchange rate movements seem to have corrected itself to its long-term market-determined path,” the CBK chief said.