Kenya’s inflation rate has fallen to the lowest level in over three years, and the shilling has remained relatively stable, setting the stage for a possible reduction of the Central Bank Rate (CBR) during the upcoming review on Tuesday.
The Central Bank of Kenya (CBK) has raised the policy rate seven times since May 2022, hitting 13 percent in February, in efforts to tame skyrocketing inflation and rein in the shilling’s depreciation amidst a series of global economic shocks.
Inflation has subsequently dropped to 4.3 percent in July, down from a high of 8.7 percent a year ago, while the shilling has remained relatively stable at Sh130 per dollar for the last three months.
Major economies that are the first stop for global capital have started easing their policy interest rates and others have shown indications of a possible easing in September or earlier, which also sets the stage for the easing by smaller economies like Kenya.
For instance, the Bank of England on Thursday lowered its interest rates for the first time since 2020, by 0.25 percentage points, to 5 percent from the 16-year high of 5.25 percent.
The US Federal Reserve maintained its rate at the 5.25 percent to 5.5 percent margin during the latest review on Thursday, but signalled a possible easing in mid-September as inflation rates stay low and the job market cools down.
Kenyan analysts predict that CBK’s Monetary Policy Committee will either lower the rate for the first time in four years, or maintain it for a possible easing during the next review.
IC Group economist Churchill Ogutu expects that with the imminent easing in the world’s largest economy –the US– the CBK should cut its policy rate by up to 0.5 percentage points as macroeconomic conditions have now stabilised to desired levels.
“Inflation has come within comfort levels and is expected to remain anchored. Shilling has also remained stable, with some near-term upside risk,” Mr Ogutu told Business Daily.
“I think it will not be challenging for the CBK to start its rate cutting cycle with the August MPC meeting. Furthermore, monetary policy easing will help deflate the risks that are emerging from the fiscal.”
The Kenya Bankers Association (KBA), however, expects the CBK to maintain the rate at 13 percent, given the macroeconomic risks the government is still facing in the near and long-term.
“Emerging government financing risks continue to pose risks to the stability of the exchange rate, further delaying the easing of interest rates,” KBA said in a research note published last week Wednesday.
The current CBR, which is the highest since September 2012, has seen borrowing and loan-servicing costs rise to record levels, causing non-performing loans and mortgage defaults to soar.
Borrowers will enjoy a reprieve in servicing their loans should the CBK lower the rate, as commercial banks will revise down their lending rates to reflect the new rate by the apex bank.
