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The Monetary Policy Committee (MPC) met early this week and decided to lower the Central Bank Rate (CBR) to 12 percent. While the press release highlighted the grounds for the cut, I was fixated on a rather frivolous point; the number of times the word “inflation” was mentioned. I counted 18 times. So what?
Well, that’s three more mentions than the previous press release to begin with. But that’s not the point, it’s the emphasis that says something: inflation is the dragon that needs to be tamed. Which begs the question: has the dragon been tamed?
As we celebrate the second (and deepest) cut from the previous that landed at 12.75 percent from 13 percent back in August, it’s clear Inflation is moderating more quickly than expected.
This tends to come with a lot of benefits. “Back-to-back” cuts are always a boon for bond markets that often move in lock step with Treasuries.
Equities do shore up too (and perhaps will) if the optimism registered in the CEOs Survey and Market Perceptions Survey (referenced by the MPC) is anything to go by.
That said, the question of inflation is always a slippery one. The operating slogan among policymakers is to “hope for the best but plan for the worst.” While indeed inflation declined to 3.6 percent in September 2024 from 4.4 percent in August, thereby remaining well below the mid-point of the target range, a return of surging prices is never hard to imagine.
Most are aware that trigger points are not in short supply. Perhaps, the most glaring one is the slowly expanding war in the Middle East, a scenario highlighted by the MPC.
Absent these clear and present dangers, I believe the MPC should have gone for a deeper cut. Why? Specifically, high interest rates have been most damaging.
The alarming ratio of gross non-performing loans (NPLs) to gross loans at 16.7 percent (August 2024) is unsustainable. The sharp deceleration in credit to the private sector and the slowdown in growth in the second quarter of 2024 illustrates this – another point also highlighted by the MPC.
Should the committee use the US Fed easing cycle and take advantage of the more room for manoeuvre to ease themselves and support economic growth? Definitely. But while that is a simple, straightforward task, it is easier said than done. Thankfully, the folks at MPC are not the gung-ho type.
Just to be clear, this is not about reading MPC tea leaves or about picking up “subtle clues” on word counts, it’s simply to state that inflation is a hard beast to slay. It’s an everyday struggle.
Equally, I am mindful that CBK’s mandate is to bring about price stability (read low and stable inflation) and hence their use of the word would feature repeatedly in their literature.
But to state the point the differently; we should always remember to temper our expectations. Inflation does not lose quietly. Any sunny expectations of further easing should always be taken with a grain of salt.
Mwanyasi is MD, Canaan Capital
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