Kenya Surprises With Big Interest Rate Cut to Prop Economy
Kenya’s central bank slashed its benchmark interest rate by a bigger-than-expected margin as muted inflation allows it to offer support to the East African economy.
The monetary policy committee lowered the key rate to 11.25% from 12%, Governor Kamau Thugge said in an emailed statement Thursday. That was more than the 50 basis point cut expected by six economists in a Bloomberg survey and the third reduction in a row.
“The MPC noted that overall inflation was expected to remain below the midpoint of the target range in the near term, supported by low fuel inflation, stable food inflation, and exchange rate stability,” Thugge said in the statement.
Annual inflation has been at the lower end of the central bank’s 2.5% to 7.5% target range since June. It quickened slightly in November to 2.8% from 2.7% a month earlier.
The MPC was also persuaded to cut to support economic activity, while ensuring exchange rate stability, Thugge said. Growth averaged 4.8% in the first six months, compared to 5.5% a year earlier and is projected at 5.1% in 2024 and 5.5% in 2025, he said.
The governor also called on commercial banks to lower rates to aid the economy.
“The committee observed that short-term rates on government securities had declined sharply in line with the CBR, but that banks had not responded by lowering their rates proportionately,” Thugge said. “The MPC, therefore, urges the banks to take necessary steps to lower their lending rates, in order to stimulate credit to the private sector, and thereby stimulate more economic activity.”
Kenya joins other central banks — including South Africa and the European Central Bank — which have eased monetary policy to spur economic activity that has been throttled by high borrowing costs.
Muted Inflation
A 21% appreciation in the shilling against the dollar this year has helped to moderate price growth. The gains are partly due to the refinancing of Kenya’s June 2024 dollar eurobond, tight monetary policy and increasing foreign-exchange reserves.
They currently stand at $8.97 billion, equivalent to 4.57 months of import cover, an adequate buffer against any short-term shocks in the foreign-exchange market, Thugge said.
The reserves are seen receiving a boost from budget financing flows from the World Bank and the International Monetary Fund. The nation also expects to draw down the first tranche of a $1.5 billion loan from Abu Dhabi early next year.
Still, the nation has a heavy external-debt wall to scale. The nation needs to raise $4.56 billion to pay maturing foreign debt and interest on external loans in the fiscal year to June 2025, according to the Treasury. That includes $300 million to repay a third of a 2027 eurobond whose first amortization is due May next year.
It will also have to borrow a net $2.7 billion offshore to plug its budget deficit, projected at 4.3% in the period.
