Kenya central bank follows SA with a surprise cut

Kenya’s central bank joined its South African counterpart by unexpectedly cutting interest rates, citing well-anchored inflation expectations and an economy that’s operating below its potential.

The monetary policy committee reduced its key rate to 8.25% from 8.5%, Governor Patrick Njoroge said in an emailed statement on Monday. That’s the second consecutive cut and moves the rate to the lowest in more than eight years. All three economists surveyed by Bloomberg said it would remain unchanged.

While inflation in both Kenya and South Africa is projected to stay inside the respective target bands, and both economies could use a boost to growth, the cut is likely to have more of an impact on demand and output in the East African powerhouse.

The central bank expects the impact of its 50 basis-point cut in November to only “kick in” three months after the decision, Njoroge told reporters on Tuesday.

“When you start running, you don’t start at 100%,” he said. “Things take time.”

Credit growth

The government last year removed a cap on borrowing costs that Njoroge had said made it difficult for policy decisions to flow to the economy and boost credit. The cap limited what lenders could charge on loans to 400 basis points above the central bank rate and weighed on credit growth as banks opted to rather invest in higher yielding bonds than finance risky borrowers. Private-sector credit grew 7.1% in the 12 months to December, and could accelerate to 11.8% this year, Njoroge said.

“The central bank is correct to conclude that there is little evidence of demand pressure elsewhere in the economy, and private-sector credit growth can certainly use the boost from this modest rate cut,” Razia Khan, chief economist for Africa and Middle East at Standard Chartered Bank, said in an emailed note.

The central bank forecasts economic growth of 6.2% this year from an estimated 5.7% in 2019 when a drought weighed on farm output, Njoroge said on Tuesday. Although there has been good rainfall in some areas, agriculture could come under renewed pressure from the worst desert-locust plague in 70 years in Kenya.

While inflation quickened to 5.8% in December, it’s been inside the target band of 2.5% to 7.5% for more than two years, and expectations remain well-anchored, the MPC said. The rate should remain inside the target band in the near term due to good rains and lower electricity prices, it said.

The shilling was little changed at 100.91 per dollar, while the yield on Kenyan Eurobonds due in 2024 fell 4 basis points to 4.76% by 12:13 p.m. in Nairobi.

The accommodative stance implies that the central bank is comfortable with the shilling, which is supported by a sound foreign-exchange reserves buffer and a current-account deficit that’s contained, said Yvonne Mhango, an economist at Renaissance Capital.

“There is downside risk” for further cuts this year, she said.

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