Analysts see the Central Bank of Kenya (CBK) lowering its key interest rate by at least 25 basis points before the end of the year on the price of reduced inflation and the need to spur soft economic activity.
The CBK’s highest decision-making body, the Monetary Policy Committee (MPC), has cut key lending rates by a percentage point since August, but most commercial banks have not reflected this on loan prices.
Analysts from 14 banks, consultants and think tanks, however, said there was room for the central bank to cut rates when the MPC meets in December.
Barcelona-based FocusEconomics, a macroeconomic research firm, said the consensus of views taken from 14 institutions is that the base interest rate will fall below the current level of 12 percent, but accelerate in 2025.
“Looking forward, we expect the CBK to continue to lower policy rates. Our assessment is that the risk is tilted towards more forward cuts amid weak economic data, FX (foreign exchange) stability supported by improving external balances and a more favorable global rate environment good,” the report quoted Goldman Sachs analysts Andrew Matheny, Mambuna Njie, and Vinayak Iyer.
Eliminating the prime lending rate is expected to lower borrowing costs as commercial lenders use these rates as a basis for their margins and individual risk profiles when pricing.
The decrease in borrowing costs is expected to lead to consumers taking funds for investment and consumption, increasing economic activity.
However, banks have come under pressure from President William Ruto and Treasury Cabinet Secretary John Mbadi, as most failed to deliver on the signal the regulator gave in early August when it lowered the benchmark rate by 0.5 percentage points.
This comes at a time when the flow of credit to companies grew 3.7 percent in July – the slowest pace since 2017 when interest rate controls were in place.
“Lending to the private sector is one of the tasks I want you (banks) to do. Credit to the private sector only increased by 1.3 percent in August which is insignificant,” President William Ruto told bankers on Wednesday.
“We want the private sector to do more and understand what the public sector needs to do. We will do our part, you do your part.
Before cutting central bank rates in August, the MPC had raised rates by 5.5 percentage points from the tightening period starting in May 2022 to July 2024 to manage inflation expectations by keeping borrowing costs in check.
The apex bank used the tightening not only to side-price pressure by asking households and businesses to postpone loans to finance non-urgent expenditures, but also to attract inflows from foreign investors, thus increasing the flow of foreign exchange.
Inflation in September fell to its lowest level since December 2012 at 3.6 percent, keeping the cost of living within the government’s target of between 2.5 percent and 7.5 percent in the medium term.
Official forex reserves, on the other hand, had last week $950 million (about Sh122.55 billion) from the last week of August to $8.30 billion (Sh1.07 trillion), or 4.3 months worth of imports, from $7.35 billion (Sh948). .15 billion), or 3.8 months of import cover.
“Kenya’s lowering of policy rates by 75bp and continued disinflation along with an improved external environment means that Kenya will provide more monetary easing in the coming months,” David Omojomolo, Africa economist for UK-based Capital Economics, wrote in a note. .
Inflation is expected to remain under control for at least the next month after fuel prices fell to their lowest levels in 19 months. Pump prices have a big impact on inflation in an economy that relies heavily on diesel for transport, power generation and agriculture, while motorists mostly use petrol.
“Kenyan motorists have benefited from the decline in Brent crude oil prices in recent months, which has filtered down to domestic pump prices,” said Shani Smit-Lengton, an analyst at Oxford Economics quoted in the FocusEconomics outlook report.
“As we predict global oil prices will continue to decline in the near term, we expect fuel price inflation to remain subdued.”
