Kenya’s Central Bank holds key lending rate at 13%

Kenya's Central Bank Governor Dr. Kamau Thugge has announced that the benchmark lending rate will remain unchanged at 13% following the bank's latest Monetary Policy Committee meeting. The MPC cited stable macro-economic fundamentals as the reason for keeping the rate steady. The MPC noted that previous measures had successfully lowered overall inflation to 5.1%, stabilized the exchange rate, and anchored inflationary expectations. Non-food, non-fuel inflation has remained consistent in recent months, and interest rates in major economies are expected to remain elevated due to the persistence of their inflation rates. The committee believes that the current monetary policy stance will help maintain overall inflation around the midpoint of the target range in the near term and ensure stability in the exchange rate. The MPC will continue to monitor the impact of this policy measure and keep a close eye on global and domestic economic developments, ready to take further action if needed. The committee discussed global developments, noting that while global inflation has moderated, some stickiness remains in advanced economies. The IMF's projections for 2024 indicate a global inflation decline from 6.8% in 2023 to 5.9% in 2024, largely driven by tight monetary policies and lower commodity prices. Despite some easing in headline inflation rates in major economies, core inflation has remained stubbornly high. International fuel prices have also decreased due to reduced Middle East conflict risk premiums and increased supply by non-OPEC oil producers. Oil prices are expected to decline on average in 2024 compared to 2023, driven by weak demand, especially in China, and stronger non-OPEC supply. OPEC plus oil producers have signaled an intention to boost production starting in the fourth quarter of 2024. Global food inflation has continued to decrease, particularly with improved supply of key food items like sugar and cereals. The Central Bank Governor highlighted that food inflation was at -7.4% in April, contributing to the overall decline in global inflation. Economist Ken Gishinga, Chief Economist at Mentore Economics, shared insights into the decision, stating that the outcome of holding interest rates steady was largely anticipated given stable inflation around the target of 5.1%. He noted that high interest rates stem from significant government borrowing, crowding out the private sector. While inflation has decreased, Gishinga highlighted the need for interest rates to follow suit to make credit more affordable for businesses. Gishinga also discussed the stability of the Kenyan shilling, which has been hovering around 130 to the US dollar. He mentioned limited tools available to the Central Bank to intervene due to low dollar reserves, emphasizing the reliance on global market forces to maintain currency stability. The impending Eurobond due in June adds pressure to Kenya's economic outlook, particularly with the World Bank suggesting a revision of growth projections downward. Gishinga pointed out that revenue-raising measures in recent tax policies have slowed economic growth, leading to a need for government budget cuts or sector-specific slashes. Another critical issue highlighted by Governor Thugge is the rise in non-performing loans (NPLs) in April 2024, reaching over 630 billion shillings, the highest in 18 years. Gishinga stressed that NPLs reflect the true state of the economy, signaling challenges across sectors like agriculture, tourism, and trade, with pending bills exacerbating the problem. The decision to maintain the lending rate at 13% underscores the Central Bank's commitment to supporting stable inflation and exchange rates amidst global economic uncertainties and domestic challenges. As Kenya navigates through these complex economic landscapes, policymakers and analysts will continue to assess the impact of monetary and fiscal policies to steer the economy towards sustainable growth and financial stability.