The Central Bank of Kenya (CBK) has enough room to make at least three rate cuts in the first half of 2025, on account of expected low inflation on reducing oil prices and stable food costs, a senior economist at global lender Citi says.
Citi Africa chief economist David Cowan said on Wednesday that while the CBK is unlikely to hit the market with a jumbo rate cut, the next two or three Monetary Policy Committee (MPC) meetings should see cuts of between 0.5 and one percentage point each.
The CBK has brought down the signal rate from 13 percent to the current 11.25 percent, via three successive cuts since August, hoping to revive growth in private sector lending by banks and boost economic growth.
“Inflation will not pick up much in the next two to three months, potentially settling at the normal level of about five percent. We think that the rate cuts will continue in the first half of next year, but not large cuts,” said Dr Cowan.
“The Citi forecast has Brent crude oil prices at between $60 and $65 for most of next year, which will be a factor in the CBK’s view of inflation.”
The CBK has been putting pressure on banks to bring down their own lending rates in tandem with the cut in the Central Bank Rate and lower interest rates on Treasury bills.
The high loan rates have been blamed for a slowdown in annualised private sector credit growth to zero percent in October 2024, from 13.9 percent in January, and a rise in non-performing loans in the banking sector to an equivalent of 16.5 percent of total loans.
On their part, banks have argued that they hold some deposits that are priced at higher rates, which need to be unwound before they can make large cuts on lending rates.
“We however expect that the deposits and loans will reprice in the December-January cycle,” said Citi Kenya managing director Martin Mugambi.
There is a risk to the rate cut outlook however should recently elected US president Donald Trump follow through with his promise to impose heavy tariffs on imported goods, make tax cuts and deport millions of unauthorised immigrants once he takes office in January.
These measures are expected to cause a jump in prices in the US, while the tax cuts could force the US government to borrow more, raising bond rates.
The rates in the US have a significant impact on the flow of capital to emerging and frontier economies like Kenya. When the world’s largest economy raises its rates, there is capital flight from smaller markets, hurting equities markets such as the Nairobi Securities Exchange (NSE).
This forces smaller economies to also raise their rates in order to attract portfolio flows, while also hitting their economies with higher external borrowing costs since they have to pay a premium to compete with the US market for funds.
