Analysts expect the Central Bank of Kenya to slash base interest rates by as much as three percentage points by end of the year to reboot the softening economy on the background of relatively stable inflation and foreign exchange market.
CBK’s top-decision making organ, the Monetary Policy committee, will hold the first meeting of this year Wednesday next week on the back of a bigger-than-expected 75 basis-point cut in benchmark lending rate to 11.25 percent during the last meeting early last December.
Commercial banks responded to the CBK’s signal by trimming average borrowing costs 33 basis points to 16.89 percent in December from 17.22 percent in the prior month which was an eight-year high.
Analysts from five of the world’s leading banks, consultancies and think-tanks say there is room for further cutting in the policy rate this year, predicting a drop of between 1.25 and 3.0 percentage points this year.
“The bank [CBK] aimed to stimulate the economy amid low fuel inflation, a stable shilling and a healthy harvest curbing food price pressures [when it lowered the signal rate by 75 basis points last December]. The bank should ease its stance further in 2025, though a weaker-than-expected shilling is an upside risk,” Barcelona-based FocusEconomics wrote in its latest Sub-Saharan Forecast report.
“FocusEconomics panelists see the central bank rate ending 2025 at 9.20 percent and ending 2026 at 8.80 percent.”
Cutting the key central bank rate is expected to lower the cost of borrowing as commercial lenders use it as a base onto which they load their margins and risk profile of individuals when pricing loans. However, banks also watch the movements in Treasury bills rate closely as they consider it risk-free.
Resultant drop in cost of loans are expected to prompt businesses and households to borrow cash for investment and consumption, boosting economic activities.
New York-headquartered Fitch Solutions, a markets analytics firm, sees the MPC slashing the policy rate by the largest rate of 3.0 percentage points by year end to 8.25 percent.
Goldman Sachs, a leading global investment bank, expects the rate to close the year at 8.50 percent, signaling a 2.75 percentage point reduction, while London-based Capital Economics projects a 1.75 percentage point drop.
Analysts at Citigroup Global Markets expect the MPC, which usually meets after every two months, to cut the policy rate by 1.5 percentage points this year, while counterparts at Standard Chartered see a modest 1.25 percentage point cut.
“Inflation ticked up in December but remained comfortably within the target range. We expect last month’s 75bp [basis point] cut to be followed by more easing this year,” David Omojomolo, Africa economist for Capital Economics, wrote in monthly Africa Chart Pack note on Thursday.
Prior to last month’s cut in loan rates, commercial banks had come under pressure from President William Ruto and his Treasury Cabinet Secretary John Mbadi to transmit the cue from the MPC into pricing loans.
“We want the private sector to do more and we know what we need to do as the public sector. We will do our part, you do yours,” Dr Ruto said last October, perhaps referring to piling pending bills which have deepened the cash flow crisis in the private sector.
Since August the MPC has cut the base rate by 175 basis points between August and December to 11.25 percent.
Before that, the MPC had raised the rate by 5.5 percentage points between May 2022 and July 2024 to manage demand-driven inflationary expectations by keeping the cost of borrowing elevated.
The apex bank used the tightening streak not only to rein in demand side price pressures by prompting households and businesses to postpone borrowing for expenditures which are not urgent, but also to attract inflows from foreign investors, thereby boosting foreign exchange inflows.
Ahead of the MPC meeting Wednesday next week, Kenya Bankers Association (KBA) called for “a further cut in the Central Bank Rate (CBR) to provide additional impetus to the ongoing downward adjustments in the commercial banks’ lending rates”.
“As lending rates remain elevated, credit growth remains muted,” KBA wrote in a research note Wednesday.
“As such, there is a need to stimulate credit growth through a further cut in the CBR alongside other measures to support the ongoing risk-based credit pricing framework and resolve credit market challenges such as the long-standing pending bills to forestall a further escalation of NPLs.”
Two analysts polled by the Business Daily, however, said they expect the MPC to keep the key lending rate steady during the February meeting to allow lenders to continue transmitting the previous monetary policy signal into the market.
