The Central Bank of Kenya (CBK) has lowered the benchmark interest rate by 75 basis points to 11.25% at its final Monetary Policy Meeting (MPC) of 2024, marking the third consecutive rate cut in the year.
The decision was prompted by the easing inflation, coupled with a slower economy in the first half of 2024 and a stable currency. Kenya’s inflation has eased progressively to the CBK’s lower bound target of 2.5% – 7.5% with the latest data showing a 2.7% reading, according to the Kenya National Bureau of Statistics (KNBS).The final MPC meeting of 2024 was also the first for the decision making bodies four newest members: Isis Nyong’o, Dr. Kemboi Kipruto, Dr. Freshia Mugo, and Jared Osoro.
“The Committee observed that short-term rates on government securities had declined sharply in line with the CBR, but that banks had not responded by lowering their rates proportionately,” Dr. Kamau Thugge, CBK Governor said.
Private sector credit growth was relatively unchanged year on year which the CBK attributes to reduced demand owing to the high lending rates coupled with effects of exchange rate valuation on foreign currency loans.
“The MPC, therefore, urges the banks to take necessary steps to lower their lending rates, in order to stimulate credit to the private sector, and thereby stimulate more economic activity,” he added.
Gross non-performing loans ratio decreased to 16.5% in October from 16.7% in August especially in the manufacturing, energy and water, financial services and agriculture sectors reflecting easing pressures.
The Kenyan Shilling has remained stable, appreciating by 17.4% since the beginning of the year, currently oscillating within the 129 mark, from lows of 160 in January. The gain is attributable to a blend of factors including long term transitory effects of the tightened monetary policy in the hindquarter of 2023, the successful Eurobond buyback in February and the subsequent settlement of the June sovereign maturity and increased foreign direct inflows.
Previously stubborn inflation and a weakening shilling prompted the CBK to raise the key lending rate from 10.5% to 12.5% in December 2023, before hiking it to 13% in February.
In August, the CBK kicked off its first easing campaign in a year with a 25 basis points rate cut, and a subsequent 75 basis points, bringing the benchmark rate to 12.00%. Despite the 1% cut in the interest rates, commercial banks are yet to fully adjust their lending rates downwards, with over half of the banks increasing their rates in October.
The dovish stance mimics other emerging economies including South Africa, Ghana, Namibia and Uganda to stimulate economic activity.