Kenya’s Inflation Falls, Treasury CS Mbadi Urges Central Bank to Cut Lending Rates

In recent months, Kenya has seen a steady decline in inflation, creating a potential turning point for the nation’s economic policies. Treasury Cabinet Secretary (CS) John Mbadi has publicly called on the Central Bank of Kenya (CBK) to lower its lending rate, signaling a crucial shift in monetary policy. As inflation eases, Mbadi and other policymakers believe that a reduction in lending rates could unlock a wave of economic growth, particularly in the private sector, which has been subdued due to the high cost of borrowing.

The Central Bank of Kenya, responsible for setting interest rates and maintaining financial stability, has played a pivotal role in managing inflation. Its decision to lower the benchmark lending rate by 25 basis points in August 2024 marked a gradual shift toward easing the country’s monetary policy. As inflation continues to fall, this article examines the rationale behind Treasury CS Mbadi’s call for further rate cuts, the impact of inflation on Kenya’s economy, and the possible outcomes of lowering interest rates.

The Recent Decline in Inflation: An Overview

Inflation is one of the most closely watched economic indicators, as it influences the cost of goods and services and affects the overall purchasing power of consumers. In Kenya, inflation has been a persistent concern in recent years, driven by factors such as volatile food prices, global commodity market fluctuations, and external economic shocks. However, the most recent data suggests that inflation has been successfully brought under control.

In September 2024, Kenya’s year-on-year inflation rate fell to 3.6%, a significant drop from 4.4% in August and 4.3% in July. This is well within the government’s medium-term target range of 2.5% to 7.5%, a range that the Treasury and the Central Bank of Kenya strive to maintain to ensure economic stability. The steady decline in inflation can be attributed to several factors, including falling global oil prices, improved domestic food supply, and the strengthening of the Kenyan shilling against major foreign currencies.

The CBK’s earlier tight monetary policy, designed to curb inflationary pressures, has also contributed to the recent easing of inflation. By maintaining higher interest rates, the central bank successfully dampened demand for loans and reduced inflationary pressures within the economy. However, as inflation falls, there is growing pressure on the central bank to shift its focus from controlling inflation to stimulating economic growth.

Treasury CS Mbadi’s Call for Lower Lending Rates

With inflation under control, Treasury CS John Mbadi has called on the CBK to lower its lending rates further. During a recent appearance at the Senate, Mbadi stated, “We think now that the central bank should start lowering the interest rate so that we encourage the private sector to uptake more loans and create job opportunities.”

Mbadi’s call for rate cuts is based on the belief that lower interest rates could stimulate borrowing and investment in the private sector, which in turn could drive economic growth and job creation. By making credit more affordable, businesses would have greater access to the capital needed to expand, innovate, and hire more workers. This would be especially beneficial in sectors such as manufacturing, agriculture, and services, which have been struggling with high borrowing costs in recent years.

Moreover, Mbadi emphasized that the current macroeconomic environment—characterized by falling inflation and a strengthening shilling—provides a favorable backdrop for monetary easing. The shilling’s recent appreciation against major currencies, particularly the US dollar, has reduced the cost of imports, thereby easing inflationary pressures. This, combined with the central bank’s previous tightening measures, has created what Mbadi describes as “ample room” for the CBK to start cutting rates without risking a resurgence of inflation.

The Central Bank’s Approach: A Gradual Path to Easing

The Central Bank of Kenya is responsible for balancing the twin goals of controlling inflation and supporting economic growth. In August 2024, the CBK lowered its benchmark lending rate by 25 basis points, a move that was seen as a cautious step toward easing monetary policy. The decision was made in response to falling inflation, with the central bank stating that there was “scope to ease policy gradually as inflation had fallen below the midpoint of its target range.”

The central bank’s cautious approach reflects its concern about maintaining financial stability in an unpredictable global economic environment. While inflation has fallen in recent months, external risks such as global commodity price volatility, geopolitical tensions, and changing monetary policies in major economies could still pose challenges to Kenya’s economic outlook.

The CBK is expected to announce its next interest rate decision on October 8, 2024. This decision will be closely watched by economists, policymakers, and business leaders, as it will signal the central bank’s approach to balancing inflation control with the need to stimulate growth. Given Mbadi’s public call for rate cuts, there is increasing speculation that the CBK could opt for further reductions in the lending rate, although the extent of such cuts remains uncertain.

The Impact of Lower Interest Rates on the Kenyan Economy

If the Central Bank of Kenya decides to follow Treasury CS Mbadi’s advice and lower its lending rate further, the effects on the Kenyan economy could be significant. The most immediate impact would be felt in the private sector, where businesses and consumers would benefit from lower borrowing costs.

Lower interest rates make loans more affordable, which encourages businesses to take on debt for expansion projects, capital investments, and hiring. This, in turn, could lead to higher levels of economic activity, job creation, and income generation. Sectors such as manufacturing, construction, and agriculture could see a resurgence in growth, as they rely heavily on access to affordable credit for their operations.

For consumers, lower interest rates could translate into cheaper personal loans and mortgages, which would increase disposable income and boost spending on goods and services. This could lead to higher demand in sectors such as retail, real estate, and tourism, further driving economic growth.

However, there are also potential risks associated with lower interest rates. If rates are cut too aggressively, there is a risk that inflation could rebound, particularly if external factors such as rising global commodity prices or currency depreciation come into play. Additionally, lower interest rates could lead to higher levels of debt, both for businesses and consumers, which could pose risks to financial stability in the long term.

The Role of Private Sector Investment in Economic Recovery

Kenya’s private sector has long been seen as a key driver of economic growth and development. However, in recent years, the sector has faced significant challenges, including high borrowing costs, limited access to credit, and a challenging business environment. These challenges have been exacerbated by the global economic slowdown, rising input costs, and the impact of climate change on key industries such as agriculture.

By lowering interest rates, the CBK could help to unlock private sector investment, which would be crucial for Kenya’s economic recovery. Increased investment in infrastructure, technology, and human capital could drive productivity gains and improve Kenya’s competitiveness in regional and global markets. Moreover, by creating more job opportunities, particularly for the country’s young and growing population, private sector investment could help to reduce poverty and improve living standards.

The Outlook for Kenya’s Monetary Policy

As Kenya’s inflation rate continues to fall, the country’s monetary policy is at a crossroads. While the Central Bank of Kenya has taken a cautious approach to lowering interest rates, there is growing pressure from the Treasury and the private sector to adopt a more aggressive stance in order to stimulate economic growth.

The CBK’s next interest rate decision, scheduled for October 8, 2024, will be a critical moment in shaping the country’s economic trajectory. If the central bank decides to cut rates further, it could signal a shift toward a more growth-oriented monetary policy, which would be welcomed by businesses and consumers alike. However, the CBK will also need to carefully manage the risks associated with lower interest rates, particularly the potential for rising inflation and increased debt levels.

In conclusion, Treasury CS John Mbadi’s call for lower lending rates reflects the growing optimism about Kenya’s economic outlook in the face of falling inflation. As the country navigates its post-pandemic recovery, the decisions made by the Central Bank of Kenya in the coming months will play a pivotal role in shaping Kenya’s economic future. By striking the right balance between controlling inflation and supporting growth, the CBK can help to create a more prosperous and stable economic environment for all Kenyans.