IMF cautions against cutting interest rates

Signage of IMF at the International Monetary Fund (IMF) headquarters in Washington, DC. FILE PHOTO | AFP

The International Monetary Fund (IMF) has cautioned against a rush to cut interest rates among African countries whose inflation has fallen in the past two months, pointing to a risk of a sharp rise in cost of living when the rate cuts boost economic activity.

Kenya is among a number of sub-Sahara economies whose headline inflation rates eased in the third quarter of the year, largely due to rate hikes and falling food prices.

Kenya’s inflation for September stood at 6.78 percent, having come down from the highs of up to 9.2 percent seen in the first quarter of the year. The Central Bank of Kenya’s (CBK) inflation target is five percent, plus or minus 2.5 percentage points.

To keep a lid on the high inflation, the CBK has since the beginning of the year raised its base lending rate from 8.75 percent to 10.5 percent—the most recent hike being the one percentage point increase implemented on June 26.

The effect has been an overall increase in cost of money in the economy, with banks’ average lending rate rising to 13.5 percent in July from 12.67 percent in December 2022, while the average deposit rate has risen to 8.1 percent from 7.17 percent.

A hold of the base rate will therefore mean that borrowers can expect to continue servicing their facilities at the elevated rates, which for the monetary authority also means reduced demand for loans and hence lower inflationary pressure.

“For countries with high but falling inflation, a “pause” may be warranted, with rates held at existing elevated levels (‘higher for longer’) until inflation is firmly on the path to target," said the IMF.

"Loosening prematurely could risk a sharp resurgence in inflation once activity rebounds,” it said in its October 2023 outlook for sub-Sahara.

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