Kenya: Central Bank cuts rates for the first time since 2020 in August
At its meeting on 6 August, the Central Bank of Kenya (CBK) kicked off its monetary policy easing cycle, lowering the key policy rate by 25 basis points to 12.75%. The move marked the first cut since early 2020 and surprised most market analysts.
The CBK was motivated by a continued decline in inflation, which inched below the mid-point of the Bank’s 2.5–7.5% target range in June–July, and expectations that price pressures will remain below the mid-point amid a stronger shilling, a healthy harvest curbing food price growth and stable energy prices. The Bank also assessed that past monetary policy decisions had successfully anchored inflation expectations. Meanwhile, the CBK referenced headwinds to economic activity from ongoing protests against the cost-of-living crisis and tight financing conditions; this likely added further pressure to lower the policy rate from its over one-decade high.
The communiqué was void of explicit forward guidance, though the Bank stated that it “stands ready to take further action as necessary in line with its mandate”. Our Consensus is for around 125 basis points of additional cuts by year-end, though the spread is large at 75–225 points.
The CBK will meet next in October.
Andrew Matheny, analyst at Goldman Sachs, commented:
“It is difficult to assess the future path of Kenyan rates because, as we have previously argued, a complete analysis of the policy implications of the budget withdrawal will have to wait until the new budget is passed and approved by the IMF. Our view is predicated on the assumption that any fiscal consolidation will now be shallower than previously expected. Therefore, we expect a wider current account deficit and rising uncertainty of external financing. This leads us to have a more hawkish rate path relative to the CBK. We would note that the risks are skewed towards a need for higher rates in the medium-term.”