The Central Bank of Kenya (CBK) conducts a Market Perceptions Survey before each Monetary Policy Committee (MPC) meeting to gather insights from banks and non-bank private sector firms regarding various economic indicators such as inflation, economic growth, credit demand, and exchange rates. The survey aims to gauge perceptions of economic conditions, business environment, and prospects, as well as gather suggestions to improve the business climate.

Key findings from the January 2024 survey included expectations of sticky inflation, moderate to strong economic activity, higher economic growth supported by agriculture, stable private sector credit growth, optimism about Kenya’s economic prospects, and similar hotel bookings compared to the previous year.

Respondents stated that they expected inflation to remain anchored around the 5 percent target in the medium term, supported by lower food inflation and reduced energy prices. Overall optimism remains high, with respondents optimistic about economic prospects in the next 12 months, although risks like weak currency and high inflation persist.

In addition to the Market Perceptions Survey, CBK conducts a Chief Executive Officers (CEOs) Survey every two months before the MPC meetings with the aim of gathering information on top firms’ perceptions, expectations, and concerns, aiding key decisions like monetary policy. 

The January 2024 survey revealed improved optimism for company, sectoral, and global growth prospects, driven by sector-specific opportunities and improved agricultural production. Expectations for Q1 2024 were positive, particularly in financial services, tourism, and professional services. Key growth drivers identified included talent management, customer centricity, and expansion into new markets. 

Constraints in businesses included business environment, economic conditions, and increased taxation, while external threats included geopolitical tensions and energy prices. To mitigate these, CEOs indicated plans to manage costs and invest in digital operations.

The Monetary Policy Committee (MPC) of the Central Bank of Kenya held a meeting on February 6th, 2024. In the meeting, a number of issues affecting the state’s economy as well as the state of the Kenyan shilling were discussed. The MPC noted:

• The overall inflation, which had remained sticky in the upper bound of the target range with an increase of 0.3% in January 2024;
• All key components of inflation–fuel, food, and non-food,non-fuel (NFNF) had increased in January 2024 by 0.2%; and
• The continued pressures on the exchange rate.

The MPC concluded that there was a need for further action to stabilise prices as well as address residual pressures on the exchange rate. The MPC proposed actions that will ensure that inflationary expectations remain anchored while setting inflation on a downward path towards the 5% mid-point of the target range.

The Committee further agreed to increase the base lending rate by 50 basis points bringing the borrowing cost percentage from 12.5% to 13%, being the highest borrowing cost in 12 years of the State’s history. The decision was taken as an effort to put an end to the freefall of the shilling and reduce borrowing rates.

The decision has greatly affected the economy in multiple ways. The Nairobi Securities Exchange(NSE) has faced dampened activity as the new borrowing rate has discouraged traders from engaging the Kenyan market. This is inclusive of foreign investors, as last month, foreign investors pulled out a total of Ksh 178.2 million from the NSE, marking a fifth straight month of withdrawals. Last week, NSE registered a total withdrawal of Sh63.2 million. This dropped the value of shares for banking and other companies by a range value of -1.88 to -5.69. (source: Business Daily). 

Overall, the MPC took a proactive stance to address inflationary pressures and ensure macroeconomic stability amidst both domestic and global uncertainties. Appreciating the CEO’s survey which concluded on the need for a stable macroeconomic environment and enabling business conditions for strengthening firms’ outlook in 2024. The next MPC meeting is scheduled for April 2024.