Central Bank cuts rates further in December

Bank delivers larger-than-expected cut: On 5 December, the Central Bank of Kenya (CBK) decided to lower its policy rate by 25 basis points to 11.25%. The move mirrored October’s same-sized cut and surprised markets to the upside.

Weak growth, soft inflation and strong shilling motivate the move: In cutting rates, the CBK once again aimed at stimulating the economy. The Bank highlighted that GDP expanded at a softer clip in H1 2024 compared to the same period in 2023, and that it forecasts growth to remain below 2023 levels in 2024–2025. Moreover, inflation stood below the midpoint of the Bank’s 2.5–7.5% target range for the eighth consecutive month in November, and the CBK expects it to remain below the midpoint in the medium term amid low fuel inflation, a stable shilling, a healthy harvest curbing food price growth.

Further reductions likely in store for 2025: The Bank’s communiqué was void of explicit forward guidance. That said, the Bank urged commercial banks to “take necessary steps to lower their lending rates, in order to stimulate credit to the private sector”, underlining its commitment to support economic growth. Given the larger-than-expected cut, our panelists are currently in the process of updating their forecasts. That said, it seems likely that further monetary policy will ensue in 2025. A weaker-than-expected shilling and faster-than-expected inflation are upside risks to rates. The Bank will reconvene in February 2025.

Panelist insight: Goldman Sachs’ Andrew Matheny commented: “In our view, the combination of a weak macro drop, improving external position and a policy rate that still remains restrictive – based on our +8.50% estimate of neutral – despite two successive 75bp rate cuts, provides scope for the CBK to continue delivering front-loaded policy easing in 2025.”

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