Kenya Cuts Rates After Scrapping Loan-Price Cap to Boost Growth

NAIROBI (Capital Markets in Africa) – Kenya’s central bank cut its benchmark interest rate for the first time in 16 months as the removal of a cap on borrowing costs will make it easier for policy decisions to flow to help boost credit and economic growth.

The Monetary Policy Committee lowered the rate to 8.5% from 9% to prop an economy “operating below its potential,” Governor Patrick Njoroge said in an emailed statement. The decision was in line with estimates by three of five economists in a Bloomberg survey.

“The committee noted the ongoing tightening of fiscal policy and concluded there was room for accommodative monetary policy to support economic activity,” Njoroge said. The East African nation’s economic growth is expected to slow this year, but the output will speed up in the second half from 5.6% in the first, according to the statement.

While low inflation gave policymakers scope to cut, a reduction during the rate-cap era would have locked out more borrowers from accessing credit, according to Yvonne Mhango, a sub-Saharan Africa economist at Renaissance Capital. The removal of the limit on borrowing costs that were in place for three years helped the central bank to regain more control over the transmission of policy decisions to the economy.

The central bank sees inflation risks remaining well anchored. Price growth is within the target of 2.5% and 7.5% despite the drought, rising fuel costs, and higher transportation and import levies.

Private-sector credit growth, which was weighed down by the cap on interest rates, is showing signs of recovery and expanded 6.6% in the 12 months through October.

The shilling weakened 0.5% to 102.043 against the dollar, it’s lowest in almost two weeks, while the yield on Kenyan Eurobonds due in 2024 fell by 5 basis points to 5.287% by 6 p.m. in Nairobi.