World Bank forecasts CBK lending rate cuts on inflation

The Central Bank of Kenya in Nairobi.

The Central Bank of Kenya in Nairobi. 

Photo credit: File | Nation Media Group

The World Bank expects the Central Bank of Kenya (CBK) to cut interest rates in the medium term, providing an accommodative environment for private-sector credit growth while helping ease the buildup of non-performing loans for the banking sector.

The proposed cut to interest rates is however pegged on similar actions by central banks in advanced economies, eliminating risks posed to inflation and the exchange rate from premature cuts by the CBK.

The recent wave of CBK interest rate increases has supported the exchange rate by spurring foreign inflows and also helped keep inflation closer to the government’s mid-point target of five percent. The country's inflation rate stood at 5.1 percent in May.

“Monetary policy is expected to turn more accommodative in the medium term as inflation dynamics continue to decelerate, advanced economies loosen monetary policy, and the shilling stabilises, hence the CBK is expected to lower interest rates in the projection period. This will reduce pressure on the banking sector and further strengthen its resilience,” the World Bank noted.

The multi-lateral lender’s observations come as the CBK holds its interest rate-setting meeting today on the backdrop of a marginal tick up in inflation from five percent in April mainly on higher food prices.

Non-food, non-fuel inflation, or core inflation, the inflation index measuring the second round effects of inflation has however edged lower, falling to 3.4 percent in May from 3.6 percent in April.

Meanwhile, the exchange rate has turned the corner since February, supported in part by a higher benchmark lending rate by the CBK with the Kenyan Shilling being among the world’s best-performing currencies this year with a year-to-date return of 16.7 percent against the US dollar as of Monday this week, having traded at Sh130.73.

In December and February, the CBK raised its key lending rate from 10.5 percent to 13 percent to address residual pressures on the exchange rate while setting inflation on a firm downward path.

On the flipside, higher interest rates have raised the cost of borrowing from commercial banks with clients paying nearly as much as 27 percent on loans at the start of 2024.

Equally, the ratio of the banking industry’s non-performing loans has soared to a 16-year record high of 15.5 percent as of February this year.

Moreover, data from the TransUnion credit reference bureau (CRB) shows that more than a quarter of loan accounts had been blacklisted at the end of 2023 as borrowers struggled with costly debt in soft economic conditions.

Private sector credit growth collapsed to 7.6 percent in March as the higher borrowing costs combined with customer defaults stalled the demand for credit as commercial banks tightened credit conditions.

Central banks in advanced economies are projected to cut interest rates in the coming year as higher borrowing costs in the countries also become inhibitive to both economic and credit growth.

The Swiss National Bank and the Swedish Central Bank have already commenced the easing in interest rates with cuts in March and May respectively with peer Central Banks being expected to follow suit in coming months.

Central bank rates are large determinants of the direction of foreign portfolio flows with cuts in advanced economies incentivising flows into emerging and frontier economies such as Kenya.

PAYE Tax Calculator

Note: The results are not exact but very close to the actual.