Kenya’s Central Bank hikes repo rate by 50 bps in inflation fight

Kenya’s Central Bank has taken a bold step by hiking the benchmark lending rate by 50 basis points to 13% as part of its strategy to curb inflation. This move is expected to have significant implications for the country's economy and its various sectors. In a recent interview with CNBC Africa, Phillip Ssali, Head of Corporate Sales & Global Markets at Standard Bank Group, shed light on the potential impact of the monetary policy tightening on Kenya's economy, inflation rates, exchange rate depreciation, and the banking sector's resilience. The decision to raise interest rates is aimed at managing inflation within the target rate of 5% set by the Central Bank, and it is expected to support long-term economic growth. Ssali noted that despite the rate hike at the end of last year, Kenya's economy showed resilience. Private sector credit growth remained positive, and there was a reduction in net non-performing loans. CEOs also expressed optimism about the country's economic outlook in a survey conducted before the rate increase. While there may be short-term challenges due to the higher cost of borrowing, Ssali believes that the move will ultimately have a positive impact on the economy as inflation is brought under control. The discussion then shifted to the issue of inflation, which has been a persistent concern in Kenya. Ssali highlighted that inflation spiked to 6.9% in January 2024, up from 6.6% in December 2023. He acknowledged the challenges posed by rising prices but emphasized that the policy decision to hike rates was a necessary step to address these issues. While short-term pain may be expected, the long-term benefits of curbing inflation should outweigh the initial challenges. The conversation also delved into the exchange rate depreciation and its potential impact on real GDP growth in Kenya. Ssali explained that the depreciation was influenced by supply and demand dynamics in the market. As the exchange rate adjusts to these factors, it should have a positive effect on inflation over time. While the cost of imports may rise initially, achieving equilibrium in supply and demand will ultimately benefit the economy. Turning to the banking sector, Ssali discussed the implications of the rate hike on credit growth and lending rates. He suggested that the response from businesses to increased interest rates would depend on the level of demand for their products. Despite concerns about higher borrowing costs, sectors like manufacturing and construction continued to show demand for working capital, indicating resilience in the face of rate hikes. The conversation extended to Uganda, where the central bank has maintained its base lending rate at 9.5%. Ssali attributed this decision to Uganda's relatively low inflation rate, which remains well below the target range of 5%. While there are risks to inflation from external factors like geopolitical tensions and exchange rate fluctuations, the central bank's cautious approach is aimed at ensuring stability in the face of uncertainties. In wrapping up the discussion, Ssali emphasized the importance of monitoring global central bank policies for their impact on investor flows into emerging and frontier markets. He highlighted the role of risk premiums in attracting investment and noted the potential for positive sentiment in the East African markets. Overall, he suggested that currency trends and supply factors would influence market outlook in the region, with opportunities for growth and investment. As Kenya and Uganda navigate economic challenges and inflation risks, strategic policy decisions and prudent fiscal management will be key to ensuring stability and growth in the region's economies. The Central Bank's proactive approach to managing inflation and supporting economic resilience through rate adjustments signals a commitment to steering the countries towards sustainable development and prosperity.