Kenya lowers the main rate more than anticipated in order to boost economy

Kenya’s central bank said there was opportunity for looser policy to assist economic growth as inflation was under control, cutting its benchmark lending rate (KECBIR=ECI), opens new tab, by a larger-than-expected 75 basis points to 11.25% on Thursday.

The Central Bank of Kenya has decreased the interest rate for the third consecutive policy meeting. Following a 25-bps cut in August, it also made a 75-bps cut in October.

Eight economists surveyed by Reuters predicted a median rate drop of 50 basis points on Thursday.

“Inflation was expected to remain below the midpoint of the target range in the near term, supported by low fuel inflation, stable food inflation, and exchange rate stability,” the bank’s Monetary Policy Committee (MPC) stated in a statement.

In November, Kenya’s inflation rate (KECPI=ECI) increased slightly from 2.7% to 2.8% year over year, but it is still comfortably within the government’s desired range of 2.5% to 7.5% in the medium run.

“The MPC noted economic growth in the first half of 2024 had decelerated, and therefore concluded that there was scope for a further easing of the monetary policy stance.”

In order to provide the market a clear signal and allow market interest rates to decline, Kenya’s umbrella banking association had demanded a large reduction in the central bank’s policy rate.

The MPC noted in its statement that banks had not lowered their rates proportionately in response to the steep decrease in short-term rates on government securities, which was in line with its target rate.

“The MPC, therefore, urges the banks to take necessary steps to lower their lending rates in order to stimulate credit to the private sector.”

The bank restated its earlier growth projections of 5.1% and 5.5% for the upcoming two years, respectively.

The administration of the East African country, which has been grappling with significant debt, has been searching for fresh funding after being forced to abandon planned tax increases totaling over 346 billion shillings ($2.68 billion) in June due to widespread demonstrations.

$1 is equivalent to 129.0000 Kenyan shillings.