According to the monetary policy committee, the country has recently registered inflation of 9% which has been the lowest in the past five months. The decline in inflation spearheads glimmering economic recovery through ease of cost of living which has been glaring over the past years.
However, the adverse effect of inflation over the past years cannot be overlooked as it has affected the Kenyan shilling, which has continuously lost its value as compared to international currencies, hence discouraging the purchase of Kenyan goods. Additionally, inflation has caused a sudden shift in the market as investors hoard their money due to the unpredictability of the market.
Economists and financial analysts have expressed that the environment for economic growth might become hostile for Kenyans as the cost of loans is expected to become expensive and consumer budgets will be expected to continue being suppressed by inflation.
With the Inflation rate, the base lending rate is concomitantly high, hence banks have become less profitable in general and therefore less willing to lend. For this reason, financial experts have reached a consensus that the environment for economic growth might become hostile for Kenyans as the cost of loans is expected to become expensive and consumer budgets will be expected to continue being suppressed by inflation. This has led to investors predicting a crescendo in the economy hence loading up on risky assets and borrowers saving up their money for a rainy day.
Businesses, for instance, will be expected to tighten their purse strings for with the spike in interest rates, they will find it more expensive to borrow and invest and that generally means less economic activity resulting in fewer jobs. Fewer jobs and lower wages consequently mean less money for households thus consumer confidence might suffer leading to less spending. With the foreseen depressed economic activity, businesses will be more reluctant to raise their prices and that will tend to pull back inflation.
In as much as raising interest rates can corral inflation, there is an impediment to the whole process, as it might lead to widespread economic pain. The brake pedal has a delay hence it might take as long as two years to see the full results from the interest rate changes.
In a bid to anchor inflationary pressures, the apex bank had decided to tighten monetary policy in November (50 bps) which is still transmitting in the economy. In addition, the outlook for global growth has also surged with easing inflation pressures in major economies particularly in the US and China since the lifting of Covid-19 restrictions.
Moreover, the government has also come up with terms to bolster the economy by allowing duty-free imports such as maize, rice and sugar and enabling CBK foreign reserves to continue to provide adequate cover and buffer against any short-term shocks in the foreign exchange market. The process of injecting bank reserves into the economy is through a policy of quantitative easing which is an expansionary monetary policy through which the central bank purchases government bonds and other securities to increase the money supply. This move lowers long-term borrowing costs to support spending in the economy hence hitting the inflation target. However, quantitative easing brings about a fall in the interest rates in the short run, as in the long run it might lead to inflation which causes the interest rates to rise causing the exact opposite of financial stability. Hence it is advisable for it to be monitored closely.
Moreover, outward forces such as the IMF have also come together to ensure the economy remains resilient by providing financial support and information on economic policies that will aid in tapering the depressed economy. Since Covid-19 took a toll on the economy, IMF has ensured that the economies in third-world countries remain afloat through the provision of finances in order to revamp the economies.
Additionally, it has also been noted that the cash reserve ratio is set at 5.25 percent of the bank’s domestic and foreign currency deposit liabilities an improvement from 4.3 percent and a clear indication of growth in terms of liquid assets.
It is therefore safe to say that, even though it is at a snail-like speed the country might be recovering from the past economic depression. The monetary policy committee is set to meet again in March 2023 to continue giving their review.
Gertrude Wachira is currently pursuing her degree in Financial Economics at Strathmore University. Her academic pursuits reflect her passion for multidisciplinary fields such as Economics, Public Policy and Governance. Additionally, she has a keen interest in reporting on business news, further highlighting her commitment to staying up to date with the latest developments in the industry. She can be reached at firstname.lastname@example.org