The Central Bank of Kenya (CBK) has reduced its benchmark lending rate, the Central Bank Rate (CBR), from 12.00% to 11.25%. The decision, announced on December 5, 2024, follows a meeting of the Monetary Policy Committee (MPC), which reviewed the current state of Kenya’s inflation and the broader global economic landscape. This marks a continued trend of easing monetary policy, partly driven by declining global inflation and more favorable domestic economic indicators.
The MPC, chaired by CBK Governor Kamau Thugge, noted that global inflation has been gradually declining in recent months. This is a significant development, as major central banks around the world, including those in advanced economies, are expected to continue lowering interest rates in a bid to stimulate economic recovery. For Kenya, this global trend is particularly relevant, as the country’s inflation remains well within the target range set by the CBK.
As of November 2024, Kenya’s overall inflation stood at 2.8%, a slight increase from 2.7% in October. However, this rate remains far below the target midpoint of 5%, within the acceptable range of 2.5% to 7.5%. The stability in inflation has been primarily attributed to the moderation of non-food, non-fuel (NFNF) inflation, which eased to 3.2% in November, compared to 3.3% the previous month.
Food inflation, however, has risen slightly, from 4.3% in October to 4.5% in November. This increase is mainly due to higher prices for select food items, particularly cooking oil, which has seen a notable rise in price. On the other hand, fuel inflation remained in negative territory, registering at -1.6% in November, a slight improvement from -1.7% in October. This decline in fuel prices, particularly for electricity and pump prices, has contributed to maintaining the overall inflation rate within manageable levels.
The MPC has expressed confidence that inflation will remain below the target midpoint in the near term, thanks to improved food supply from ongoing harvests, favorable weather conditions, lower fuel prices, and a stable exchange rate. These factors, along with a slowdown in economic growth in the first half of 2024, have prompted the CBK to lower its lending rate in order to encourage borrowing, which is vital for stimulating economic activity.
The committee emphasized that the lower base lending rate will help create more favorable conditions for businesses and households to access credit. However, the CBK also noted that commercial banks have not yet fully passed on the benefits of the reduced CBR to their customers. Despite short-term interest rates on government securities dropping in line with the CBR, banks have been slow to adjust their lending rates accordingly. The MPC has urged banks to lower their rates to encourage more credit flow to the private sector, which is expected to support economic expansion.
In terms of the banking sector’s health, the CBK has reported strong liquidity and capital adequacy ratios, which have bolstered its resilience in the face of external shocks. However, there has been a notable contraction in foreign currency-denominated loans, which fell by 11.8% as demand for these loans has been suppressed by high lending rates. Meanwhile, local currency-denominated loans grew by 4% in October 2024, reflecting steady demand for credit in the domestic market.
The regulator also highlighted the stability of the foreign exchange market, with foreign exchange reserves standing at USD 8.97 billion, providing a buffer against any potential short-term volatility. This reserve is enough to cover 4.57 months of import needs, which offers additional security for the economy.
The next MPC meeting will take place in February 2025, where the committee will reassess the economic conditions and adjust the monetary policy stance as needed to support growth and maintain inflation within the target range.
In conclusion, the CBK’s decision to lower the CBR is a strategic move aimed at stimulating credit to the private sector and supporting overall economic activity. As inflation remains under control and global economic conditions improve, this policy shift is expected to provide a conducive environment for Kenya’s economic growth.
