CBK seen cutting rates in 2024 as global peers signal shift

Central Bank of Kenya (CBK) Governor Kamau Thugge before National Assembly Departmental Committee on Finance and National Planning at Parliament buildings Nairobi on August 16, 2023. PHOTO | DENNIS ONSONGO | NMG    

By KEPHA MUIRURI More by this Author

The Central Bank of Kenya (CBK) is tipped to cut interest rates next year, benefitting from similar moves expected to be made by its peers in developed economies and a slowdown in inflation in the country.

While CBK has recently tightened its monetary policy by advancing the benchmark interest rate to 12.5 percent from 10.5 percent earlier this month, analysts expect the regulator to pivot as the cost of living falls and easing by major central banks reduces pressure on the shilling and competition for capital flows.

Read: World Bank backs CBK's pause on rate increases

“In December 2023, the Monetary Policy Committee (MPC) increased the policy rate noting that it was necessitated primarily by downward pressure on the shilling,” business advisory firm Deloitte says in its 2024 outlook report.

“The MPC is likely to maintain the benchmark rate and implement gradual cuts in 2024. However, further interest rate increases in developed economies might compel the MPC to implement a tighter monetary policy stance, which will have an adverse impact on private sector borrowing and in turn, reduce consumption and investments.”

Last week, the US Federal Reserve signalled it would begin cutting interest rates from 2024 to avoid a recession in the US where its current tight monetary policy has helped bring down inflation.

Looser monetary policy in advanced economies is expected to ease pressure on the domestic exchange rate by incentivising capital inflows to emerging and frontier economies like Kenya.

Domestically, inflation has fallen back to within CBK’s target band of 2.5 to 7.5 percent in recent months with the latest inflation print standing at 6.8 percent in November from 6.9 percent in October.

CBK has cumulatively raised interest rates by 5.5 percent since it began its tightening cycle in March last year, lifting the benchmark rate from seven percent.

While raising the benchmark interest rate earlier this month, the CBK stated further tightening was necessary to stem the exchange rate depreciation and anchoring inflation expectations further.

“The MPC concluded there is a need to adjust the monetary policy stance to address the pressures on the exchange rate and mitigate second round effects including from global prices,” the CBK stated.

Read: CBK rejects Sh33bn bond bids in rates standoff

A reversal of the CBK’s tight monetary policy is expected to lower interest rates on bank loans and returns on government debt securities whose yields have rallied to nearly 18 percent. The high returns on Treasury bills and bonds is among the factors that have contributed to the decline in prices of shares listed on the Nairobi Securities Exchange.

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