The Central Bank of Kenya (CBK) reduced its benchmark lending rate by 0.25% to 12.75% on Tuesday.
This marks the first rate cut since March 2020, signalling a shift in monetary policy. The decision comes as inflation eases and the Kenyan shilling strengthens.
The move aims to stimulate economic growth by making borrowing more affordable for businesses and individuals.
“The MPC concluded that there was scope for a gradual easing of the monetary policy stance while ensuring continued exchange rate stability. Therefore, the Committee decided to lower the Central Bank Rate (CBR) to 12.75%,” CBK Governor Kamau Thugge said in an emailed statement Tuesday.
The rate cut decision aligns with the Federal Reserve’s expected policy easing in September. The central bank assessed that this would not significantly impact the local currency due to potential capital flow reversals and continued support from the current account.
Exports have surged, while imports have grown at a slower pace, leading to an expected current account deficit of 4.0% of GDP by year-end. Nevertheless, dwindling foreign exchange reserves pose a risk to deficit sustainability.
The central bank anticipates inflation to remain within the lower target band in the near term, supported by moderating core prices, declining fuel costs, and an expected bumper harvest.
“Kenya’s overall inflation declined to 4.3% in July 2024 from 4.6% in June, thereby remaining below the mid-point of the target range,” Thugge said.
However, the bank’s optimism about economic growth, projecting a 5.4% expansion in 2024, exceeds market expectations according to NCBA Market Research post MPC reaction.
While the non-agricultural sectors are anticipated to underperform, leading to overall GDP growth closer to 5.0%, the central bank acknowledges potential headwinds such as geopolitical risks.
“For us, significant growth outside agriculture and services sectors is unlikely due to muted industrial activity, thus, real GDP growth could settle at just about 5.0% this year,” says NCBA Post-MPC Reaction statement.
The MPC’s decision reflects a balance between stimulating growth and maintaining financial stability. While the rate cut signals a potential for further monetary easing, the banking sector’s challenges warrant continued vigilance.
