Kenya Cuts Rates for First Time Since 2013 on Slow Inflation in May

NAIROBI, Kenya, Capital Markets in Africa: Kenya’s central bank cut its key rate by 100 basis points to 10.5 percent, the first reduction in three years, as the rate of inflation decelerates to within the government’s target corridor.

Only two of nine economists and analysts polled by Bloomberg expected the decision. Central bank Governor Patrick Njoroge said in an interview in Kigali, Rwanda, earlier this month falling consumer prices, which are now within the government’s 2.5 percent to 7.5 percent target range, gave it space to “adjust from the tight monetary stance that was there.” The rate was lowered from 11.5 percent, according to a Monetary Policy Committee statement e-mailed Monday from the capital, Nairobi.

“The committee noted that overall inflation is expected to decline and remain within the government target range in the short-term,” Njoroge said in the statement. “Therefore, it concluded that there was policy space for an easing of monetary policy while continuing to anchor inflation expectations.”

The central bank raised its benchmark interest rate twice last year by a total of 300 basis points to 11.5 percent, which helped curb inflation to 5.3 percent in April from a peak of 8 percent at the end of 2015.

‘More Aggressive’ 
“It was a bit more aggressive than expected,” Mark Bohlund, Africa economist with Bloomberg Intelligence in London, said in e-mailed comments. “This is in line with indications that Njoroge has taken some of the criticism of the CBK being slow to react under Njuguna Ndung’u to heart,” he said, referring to the immediate former governor. Njoroge was appointed in June 2015.

There is potential for another 50 to 100 basis points in cuts by the end of the year, although an increase in excise duty in the second half and higher energy prices may lift inflation, Bohlund said. Kenya’s government plans to increase excise levies on cars, fuel, cigarettes, alcohol and financial services in the new financial year starting in July.

“It’s a pre-emptive move, the CBK governor has underscored his reputation on inflation targeting,” Jibran Qureishi, an economist at CFC Stanbic Bank Ltd., said by phone from Nairobi. “He has probably seen that there is limited upside risk to inflation and has a better handle on what treasury will do on excise tax come July.”

In recent weeks, the Kenyan yield curve has steepened in anticipation of formal policy easing, according to Gareth Brickman, an Africa analyst at ETM Analytics. The yields on Kenya’s 91-day Treasury bills fell to 7.998 percent at a sale on May 19, from 8.189 percent a week earlier. The six-month paper returned 10.137 percent at the latest auction from 11.689 percent previously.

The government expects economic growth of 6.1 percent this year after expansion of 5.6 percent in 2015 and for the shortfall on its current account, the broadest measure of trade in goods and services, to narrow to 6.3 percent of gross domestic product following stronger foreign-exchange inflows from agriculture and tourism. The shilling has gained 1.4 percent against the dollar this year.