Kenya: Central Bank cuts more sharply in February
Bank delivers larger cut, as expected: On 5 February, the Central Bank of Kenya (CBK) lowered its policy rate by 50 basis points to 10.75%. This reduction, the fourth consecutive, was larger than December’s quarter-point cut and had been penciled in by market analysts. Moreover, the Bank slashed the cash reserve ratio—for the first time in almost five years—by 100 basis points to 3.25%.
Sluggish domestic demand and low inflation motivate the cut: The cut aimed at supporting economic activity: The Bank noted that annual GDP growth slowed in Q3 and is forecast to have decelerated over 2024 as a whole. Though the CBK expects the economy to pick up pace in 2025, it highlighted that credit to the private sector remains subdued, straining domestic demand; as a result, the Bank saw scope for further monetary policy easing and decided to cut the cash reserve ratio. Moreover, inflation remained below the midpoint of the CBK’s 2.5–7.5% target range for the tenth consecutive month in January, and the Bank expects it to remain below the midpoint in the medium term amid muted demand-side pressures, low fuel inflation and a stable shilling, giving it more room to comfortably reduce rates.
Loosening cycle to maintain a healthy head of steam in 2025: The Bank’s communiqué was void of explicit forward guidance. That said, the CBK stated that it has started an “on-site inspection of [commercial] banks” to make sure that they are passing on lower interest rates to clients, underlining its commitment to support economic growth. For 2025, our Consensus is for inflation to remain below the midpoint of the target band, but for the economy to undershoot the CBK’s 5.4% growth projection; as such, our panelists have penciled in 75–250 basis points of further reductions by the end of the year. The Bank will reconvene in April.
Panelist insight: Oxford Economics’ Shani Smit-Lengton said:
“Despite recent monetary easing, policy is likely to remain tight. Following the central bank’s 50-bps rate cut on February 5, we anticipate just one additional cut of the same magnitude in Q2 2025. Persistently below-potential economic growth and inflation remaining under the midpoint target should justify a further reduction.”
Analysts at the EIU commented on the risks to the shilling:
“The CBK will probably have sufficient scope for additional interest-rate cuts in 2025, but the timing and scale will depend partly on US monetary policy. A prolonged pause in US interest-rate cuts, coupled with deeper cuts in Kenya, would risk putting undue downward pressure on the shilling.”