Kenya: Central Bank cuts interest rate to 10.50% in May on easing inflation
May 23, 2016
The Central Bank of Kenya (CBK) cut the Central Bank Rate (CBR) from 11.50%, where it had been resting since last July, to 10.50% on 23 May. The Bank mainly cut the rate on the back of lower inflation. May’s decision caught market analysts by surprise, as they had expected that the Bank would keep the rate unchanged.
As for price developments, the CBK stated that inflation fell to 5.3% in April, principally because of lower prices for food and fuel. As a result, inflation rested within the Bank’s target range of 5.0% plus/minus 2.5 percentage points. Several other indicators also pointed to a moderation of inflationary pressures in April. Moreover, the Bank stated that the exchange rate was broadly stable—supported by a lower oil import bill, higher tea and horticulture exports as well as solid remittances—and that foreign currency reserves increased to five months of import cover in May. According to the CBR, solid reserves together with the IMF’s precautionary arrangement provide adequate buffers against potential external shocks. Moreover, the Bank noted that an expected decrease in the fiscal deficit this year should abate pressure from interest rates.
The Bank added that following the closing and reopening of Chase Bank, the banking sector was resilient and showed signs of stabilization. However, in the Bank’s assessment, liquidity risks remain a concern for the system and the CBR pledged to monitor it carefully. As for economic growth, the Bank was positive, stating that GDP expanded fast in 2015 and that its Market Perception Survey from May pointed to continued momentum in the private sector.