KEY POINTS
- Kenya’s Central Bank cuts interest rate by 75 basis points to 11.25 percent.
- Inflation remains well within target, easing economic pressures.
- The government seeks new financing after scrapping tax hikes.
Kenya’s Central Bank took an unexpected step on Thursday, cutting its benchmark interest rate by 75 basis points to 11.25 percent.
This marks the third consecutive rate cut as the bank aims to stimulate economic growth amid a stable inflation environment. Analysts were anticipating a smaller, 50 basis points reduction, making this decision a surprise to many.
Central bank’s move signals support for growth
In a statement, the Central Bank of Kenya (CBK) explained that inflation was well-controlled, making room for a looser monetary policy.
Despite a slight uptick in inflation to 2.8 percent year-on-year in November, it remains well within the government’s target range of 2.5 percent-7.5 percent.
The CBK also noted that stable fuel prices, food inflation, and exchange rate stability were key factors supporting the decision.
“The Monetary Policy Committee (MPC) observed that economic growth in the first half of 2024 had slowed,” the CBK said. “This created room for further easing of the monetary policy stance.”
Kenya’s banking sector has been under pressure to follow suit with lower lending rates. Although short-term rates on government securities have dropped in response to the central bank’s rate cuts, commercial banks have yet to pass on these savings to borrowers.
The CBK urged banks to reduce their lending rates, aiming to encourage credit flow to the private sector, which would help stimulate overall economic activity.
Inflation remains manageable despite growth concerns
Inflation in Kenya had been hovering just above the 2.5 percent-7.5 percent target range, but the latest increase to 2.8 percent is not alarming.
Food prices have remained relatively stable, while low fuel inflation and a stable exchange rate have kept inflation manageable. The government has made significant progress in curbing inflation, which has been a key challenge for the country in recent years.
In its statement, the CBK noted that inflation is expected to stay below the midpoint of the target range for the near term.
According to Reuters, this outlook gave the bank the confidence to reduce its benchmark lending rate once again, signaling its readiness to support growth even as challenges persist.
Government’s debt struggle and new financing outlook
As Kenya faces mounting debt pressures, the government has been looking for alternative financing sources. Recent mass protests led the government to cancel tax hikes worth more than 346 billion shillings ($2.68 billion) that were initially planned to address fiscal deficits.
The country’s debt situation remains a concern, and the government’s focus has shifted to securing new sources of revenue and financing to manage the deficit while also fueling economic growth.
Despite these challenges, Kenya’s economic outlook for the next two years remains relatively stable.
The CBK has reiterated its growth forecasts of 5.1 percent for 2024 and 5.5 percent for 2025. With inflation under control and a supportive central bank, the country hopes to maintain steady growth, even as global economic conditions remain uncertain.
