Kenya: Central Bank slashes policy rate to lowest level in three years
In a surprise move, the Monetary Policy Committee (MPC) of the Central Bank of Kenya opted to cut the Bank Rate by 50 basis points, to 9.50% from 10.00% at its meeting held on 19 March. The decision came against a backdrop of slowing inflation, sustained macroeconomic stability and an improving business environment, which bode well for the country’s economic growth prospects. It also marked the first rate cut in 18 months.
Inflation moderated from January’s 4.8% to 4.5% in February, remaining comfortably around the midpoint of the Central Bank’s 2.5%–7.5% target range. February’s reading mirrored December’s print, marking the joint-lowest inflation rate in nearly five years. The moderation was primarily driven by lower food prices, outweighing higher fuel prices that were inflated because of rising global oil prices. Improved weather conditions are expected to keep food prices contained in the near term, which in turn should subdue inflationary pressures and keep inflation within the target range. As a result, the Bank saw scope for easing its monetary policy stance to support economic activity and lift output from the current below-potential level.
While the rate cut is designed to help spur credit growth in the economy, an interest rate cap introduced in 2016 could stifle its impact. The cap has caused banks to become more cautious, shunning smaller borrowers, and has led to widespread criticism of the policy by market analysts. However, speculation that the cap could be amended or abolished is rising due to recent comments from Treasury Secretary Henry Rotich.
Looking forward, the MPC stated in its accompanying statement that it “will closely monitor the impact of [the rate cut] in its policy stance” and that it “stands ready to take additional measures as necessary”, thus leaving the doors open for further cuts or a change in policy down the road.