Nairobi — Kenya’s central bank joined its South African counterpart by unexpectedly cutting interest rates, citing well-anchored inflation expectations and an economy that’s operating below its potential.
The monetary policy committee (MPC) reduced its key rate to 8.25% from 8.5%, governor Patrick Njoroge said in an e-mailed statement on Monday. That’s the second consecutive cut and moves the rate to the lowest in more than eight years. All three economists surveyed by Bloomberg said it would remain unchanged.
While inflation in both Kenya and SA is projected to stay inside the respective target bands, and both economies need a boost to growth, the cut is likely to have more of an affect on demand and output in the East African powerhouse. In 2019 the government removed a cap on borrowing costs that Njoroge had said made it difficult for policy decisions to flow to the economy and boost credit.
The cap limited what lenders could charge on loans to 400 basis points above the central bank rate and weighed on credit growth as banks opted to rather invest in higher yielding bonds than finance risky borrowers. Private-sector credit grew 7.1% in the 12 months to December and the MPC said it is expected to increase gradually.
“The central bank is correct to conclude that there is little evidence of demand pressure elsewhere in the economy, and private-sector credit growth can certainly use the boost from this modest rate cut,” Razia Khan, chief economist for Africa and Middle East at Standard Chartered Bank, said in a note.
Economic growth slowed to a two-year low of 5.1% in the third quarter as a drought weighed on farm output. Though there has been good rainfall in some areas, agriculture could come under renewed pressure from the worst locust plague in 70 years in Kenya.
While inflation quickened to 5.8% in December, it’s been inside the target band of 2.5% to 7.5% for more than two years, and expectations remain well-anchored, the MPC said. The rate should remain inside the target band in the near term due to good rains and lower electricity prices, it said.
The shilling was unchanged at 100.9/$, while the yield on Kenyan Eurobonds due in 2024 rose 11 basis points to 4.81% by 6pm in Nairobi.
The accommodative stance implies that the central bank is comfortable with the shilling, which is supported by a sound foreign-exchange reserves buffer and a current-account deficit that’s contained, said Yvonne Mhango, an economist at Renaissance Capital. “There is downside risk” for further cuts in 2020, she said.
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