Market analysts are anticipating a 0.5% reduction in the Central Bank of Kenya’s (CBK) benchmark interest rate during today’s Monetary Policy Committee (MPC) meeting, potentially lowering it to 12.25%. This adjustment is expected to stimulate economic growth.
Emilio Munene, a Macroeconomics analyst and Bank Economist at Equity Group Holdings, explained that the rate cut reflects a broader easing of monetary policy, driven by favorable economic indicators.
The anticipated reduction is attributed to declining inflation, a stronger Kenyan shilling, and global trends favoring lower interest rates. According to Munene, “Such a move would not only boost Kenya’s economic recovery but also incentivize borrowing, investment, and consumer spending.” Lower interest rates typically encourage businesses and consumers to take on loans, fostering investment and consumption.
Kenya’s inflation rate dropped to 3.6% in September 2024, down from 4.4% in August, marking the lowest rate in nearly twelve years. This decline is attributed to reduced non-food, non-fuel price growth and lower energy costs. Fuel inflation eased slightly to 6.08%, while food inflation rose to 5.39%. The appreciation of the Kenyan shilling has significantly lowered import costs, contributing to overall price stability.
Investment bankers Genghis Capital noted that the successful measures taken thus far have brought inflation below the midpoint target. Additionally, the shilling has appreciated by 21% against the dollar since the beginning of the year, creating room for the CBK to ease monetary policy without risking inflation.
Global economic trends, such as a decline in crude oil prices from $83.26 per barrel in August to $72.42 in September, have further contributed to stabilizing local prices.
Despite a slight contraction in the private sector, as reflected by the Purchasing Managers’ Index (PMI) falling to 49.7 in September, businesses are increasingly purchasing to build inventories, suggesting optimism.
Kenya’s Gross Domestic Product (GDP) growth slowed to 5% in the first quarter of 2024, down from 5.6% in 2023, marking the slowest rate since 2021. Key sectors like ICT and financial services continue to show robust growth, but manufacturing remains sluggish at just 1.3%.
The CBK’s previous rate cut by 25 basis points to 12.75% during the August 6 meeting was based on stabilizing the shilling and anchoring inflation expectations. The MPC acknowledged that the earlier rate hikes aimed at controlling inflation had succeeded but indicated that recent trends suggested easing could further support economic recovery.
Concerns within the banking sector regarding high interest rates and rising non-performing loans (NPLs) have been prevalent, with NPLs increasing from 16.1 per cent in April to 16.4 per cent in June. The slowdown in private sector credit growth fell to just 4 per cent in June compared to 7.9 per cent in March. As global central banks like the European Central Bank and the US Federal Reserve signal shifts towards looser monetary policies amid stabilised inflation, there is mounting pressure on the CBK to follow suit.
