Kenya Central Bank Holds Key Interest Rate After Four Cuts

NAIROBI (Capital Markets in Africa) — Kenya’s central bank maintained its benchmark interest rate to allow the effects of four consecutive cuts filter to the economy.

The monetary policy committee retained the rate at 7%, Governor Patrick Njoroge said in an emailed statement Wednesday. That matched the projection of one of the three economists in a Bloomberg survey. The panel has reduced the rate by 200 basis points since November.

Key Insights:

• The decision was a “surprising development,” according to Razia Khan, chief economist for Africa at Standard Chartered Bank. The central bank may have held at Wednesday’s meeting because of the recent weakening of the shilling against the dollar, near-term inflationary pressure and leftover liquidity following the reduction in cash reserve requirements in March, she said.
• “Given the downside risks to the economy this year, we still expect to see the central bank rate at 5% by the year-end,” Khan said in an emailed note.
• The best sources of foreign exchange for East Africa’s biggest economy — remittances, horticultural exports and tourism — have all but dried up due to the Covid-19 pandemic, placing pressure on the currency and imperiling output.
• The central bank has cut its economic growth forecast to 2.3% this year, from an earlier estimate of 6.2%. The expansion was already slowing and came in at 5.4% last year, from 6.3% in 2018.
• While concerned about Kenya’s rising indebtedness, both the World Bank and the International Monetary Fund said the nation can delay fiscal consolidation plans to protect the economy from the fallout of the global scourge.
• The World Bank has approved a $1 billion loan for budget support and the IMF has agreed to a $739 million facility to cover the balance of payment shortfalls.
• Kenya’s inflation rate has remained within the central bank’s target range of 2.5% to 7.5% since August 2017 but could accelerate as a locust invasion ravaging much of the region and flooding hurt food production.