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Kenya Monetary Policy February 2024

Kenya: Central Bank surprises markets with a hike in February

At its first meeting of 2024 on 6 February, the Monetary Policy Committee of the Central Bank of Kenya (CBK) increased its policy rate by 50 basis points to 13.00%. As a result, the policy rate reached its highest level in over a decade. The move, which came on the heels of December’s 200 basis point hike, surprised most market analysts on the upside.

The decision to hike was driven by inflation having hovered around the upper bound of the 2.5–7.5% target range since July 2023; price pressures increased to 6.9% in January. In particular, the CBK noted that upside inflationary risks remain, especially the depreciation of the shilling, which has been losing ground against the USD since May 2021. Therefore, the Bank aimed to anchor inflation expectations and assure the downward path of inflation towards the mid-point of the target range; the hike should mitigate price pressures by depressing domestic demand and supporting the shilling.

The CBK’s communiqué was void of explicit forward guidance. That said, the Bank underlined that it “stands ready to take further action as necessary in line with its mandate”.

Given the surprise hike, our panel is in the process of revising its forecasts for the policy rate ahead. The next monetary policy meeting will be held in April, with the Bank yet to specify an exact date.

Analysts at the EIU commented on their forecast for the policy rate:

“We viewed February’s interest-rate rise as an outside possibility, which materialised, but we now believe that the CBK’s monetary tightening cycle is over, especially given the prospect of US interest-rate cuts later in 2024. Balancing the positive implications for inflation and the exchange rate, the CBK’s hawkish stance will dampen credit uptake, consumption and investment, to the detriment of growth.”

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