Kenyan market analysts are growing optimistic about a potential 0.5% reduction in the Central Bank Rate (CBR), which could bring it down from 12.75% to 12.25%. This optimism stems from the ongoing trend of inflation rates staying within the government’s target range.
Veronica Ndegwa from the IPF Group noted that this move would reflect the Central Bank of Kenya’s (CBK) efforts to balance economic stability while addressing the high lending rates that burden many borrowers.
On August 6, 2024, the CBK already began easing its key policy rate, reducing it by 25 basis points to 12.75% to support economic growth amid fluctuating inflation and align with global trends. The latest data shows Kenya’s annual inflation rate slightly increased to 4.4% from 4.3% the previous month but remains manageable within the target range of 2.5% to 7.5%.
“The main determinant is the inflation rate, which has remained within the government range and has been coming down for a while now,” Ndegwa said, reinforcing the possibility of further easing measures by the Monetary Policy Committee (MPC), expected to meet early next month. The aim is to stimulate borrowing and investment without causing inflationary spikes.
Adding to the context is the recent decision by the US Federal Reserve (Fed) to cut its benchmark interest rate by 0.50 percentage points, the first reduction in four years, due to moderating inflation and a weakening labor market.
The new target range for the federal funds rate is now between 4.75% and 5%. This decision by the Fed could have positive spillover effects on emerging markets like Kenya, further encouraging favorable monetary policies.
Lower interest rates in the U.S. may lead investors to seek higher returns in emerging markets like Kenya, potentially making Kenyan assets more attractive for foreign direct investment (FDI). In 2023, Kenya experienced a notable surge in FDI inflows, reaching approximately $728.7 million (Sh93.6 billion), up from $393.6 million (Sh50.6 billion) in 2022, reflecting growing investor confidence.
A weaker U.S. dollar, driven by lower interest rates, could strengthen the Kenyan shilling. This would make imports cheaper and ease the burden of servicing Kenya’s foreign-denominated debt, which stood at about $39.2 billion (Sh5.8 trillion) as of March 2024.
By late September 2024, the Kenyan shilling was trading at 129 to the dollar. A stronger shilling could further benefit Kenya’s economy by reducing import costs and improving the trade balance, creating a more favorable environment for growth.
Analysts suggest that a reduction in the Central Bank Rate (CBR) could lead to lower lending rates, which currently hover around 20%. This would make borrowing more affordable for both individuals and businesses, stimulating investment and consumption.
As the Central Bank of Kenya (CBK) continues its monetary easing strategy, it will carefully monitor domestic indicators such as gross domestic product (GDP) growth and employment rates. Kenya’s economic growth is projected to reach 6% in 2024, driven by increased agricultural output and a growing services sector.
