Kenya: Central Bank cuts the benchmark rate by 50 basis points for the second time this year
July 30, 2018
At its recent meeting held on 30 July, the Monetary Policy Committee (MPC) of Kenya’s Central Bank cut the Central Bank Rate (CBR) to 9.00% after the rate was held at 9.50% at its last meeting in May. The Bank’s decision largely came as a surprise to market analysts.
The Bank’s accompanying statement highlighted that, while there has been a strong pick-up in economic activity aided by an acceleration in private sector credit, below-potential activity and well-anchored inflation expectations within the Bank’s 2.5%–7.5% target range in the near-term have left room to adopt a more accommodative monetary policy stance. In justifying the decision to slash the rate for a second time this year, aimed at boosting growth and stimulating higher private-sector lending, the MPC noted that the previous cut yielded a smaller and slower-than-intended impact on key variables, including the pace of expansion in economic activity and private credit. Since the return to political stability and the end of a prolonged drought which yielded an upturn in agricultural output, growth has staged a notable recovery, rising to 5.7% in Q1, up from 5.3% in the previous quarter. Meanwhile, inflationary pressures, although on the rise since April, have been relatively subdued: Inflation inched up to a five-month high of 4.4% in July, from 4.3% in June.
Strong economic growth is expected this year, with sustained optimism in the MPC’s Private Sector Market Perception Survey conducted in July 2018. Growth this year should be fueled by an ongoing recovery in the agricultural sector, completion of key infrastructure projects, and a focus on investment in sectors prioritized by the government’s “Big Four” agenda. A robust upturn in exports, healthy remittance inflows, and a brighter tourism sector should help improve the current account, with stronger investor confidence encouraging a greater inflow of foreign investment. While inflationary pressures are expected to rise on higher oil prices, inflation is expected to remain within target, mainly due to expectations of lower food prices.
The Bank struck a broadly neutral tone, stating that it would continue to monitor developments in the global and domestic economy, including the rise in global oil prices, the pace of monetary policy normalization in the U.S. and the looming trade war.
The date of the next monetary policy meeting has yet to be decided.
Author: Nihad Ahmed, Economist