Economists Urge Central Bank to Cut Base Rate Amid Low Inflation

The Central Bank of Kenya (CBK) is facing mounting pressure to reduce its base rate to 10 percent, with leading economists arguing that the current high rates are stifling economic growth and recovery. They highlight that the present Central Bank Rate (CBR) of 13 percent is misaligned with the recent downward trend in inflation, making it counterproductive to maintain such a high interest rate in a low-inflation environment.

Inflation in Kenya has stabilized within the CBK’s target range of 2.5 percent to 7.5 percent, with the mid-target set at 5 percent. The latest data shows that the inflation rate dropped to 4.60 percent in June 2024, down from 5.10 percent in May, and it is projected to hover around 5.30 percent by the end of the quarter.

Churchill Ogutu, an economist at IC Group, an Africa-focused investment bank, emphasized that the CBK has been slow to adjust to current inflation trends. He noted that while inflation has been easing, the CBK has maintained high interest rates. Ogutu criticized this approach as backward-looking, asserting that the regulator is reacting to past inflation data instead of proactively addressing the anticipated future inflation trajectory.

“Based on the current inflation trends, I can argue that the CBR rates are behind the curve,” Ogutu told the Business Hub. “Look at the inflation outturn even now. It has come back to the target level. This solidifies the argument that the next meeting of the Monetary Policy Committee (MPC) next month should result in a rate cut.”

KEEP READING: Budget Committee to Deliberate on New Finance Bill, Says Ndindi Nyoro

Ogutu believes that reducing the base rate would have a positive ripple effect on the broader interest rate environment, which he described as “quite crazy.” He stated that a rate cut would signal to the market that rates need to come down, fostering a more stable and predictable interest rate regime that supports economic recovery.

The CBK now faces a critical decision on the extent of the rate cuts. According to Ogutu, the central bank must weigh whether to cut rates before the US Federal Reserve (Fed) potentially raises its rates later or to proceed with a cut regardless of the Fed’s actions. He argues that cutting rates now would assert the CBK’s independence and better address domestic economic conditions.

The MPC’s upcoming meeting next month will be closely watched, as the decision could significantly influence Kenya’s economic trajectory. Economists and market participants are keen to see if the CBK will heed the calls for a rate cut and take a more proactive stance in supporting economic growth amidst a period of low inflation.

KEEP READING: Innovate Africa Fund Launches With $2.5M Rollout: Fostering Innovation Across the Continent