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The Central Bank of Kenya (CBK) is expected to make a bigger cut of the benchmark lending rate after inflation dropped to its lowest level in 12 years.
Treasury officials, analysts and bankers bet that the CBK will lower the central bank rate by a margin bigger than the 25 basis points in August to 12.75 percent.
The expectation may itself put pressure on commercial banks to lower lending rates at a time when households and firms are plagued with costly loans.
The Kenya Bankers Association (KBA) called for a ‘decisive’ cut to preserve economic growth and rekindle the demand for credit.
Inflation fell to 3.6 percent in September from 4.4 percent a month earlier on easing food, energy and transport expenses, Kenya National Bureau of Statistics (KNBS) said.
This is the lowest cost of living measure since December 2012 and keeps inflation within the government targets of between 2.5 percent and 7.5 percent in the medium term.
“In the view of these developments, and a well anchored inflationary pressure, there is scope to effect a decisive policy rate cut to protect and support stronger economic growth through a recovery in private sector credit growth,” the banking sector lobby said in a research note on Thursday.
Previously, KBA acting chief executive officer Raimond Molonje said a 0.5 percent cut in the benchmark would trigger commercial banks to cut lending rates.
The central bank is due to announce its next interest rate decision tomorrow (Tuesday).
It lowered its benchmark lending rate by 25 basis points in August to 12.75 percent, saying there was scope to ease policy gradually as inflation had fallen below the midpoint of its target range.
Treasury Cabinet Secretary John Mbadi said the CBK should start lowering its lending rate in the wake of the fall in the cost of living measure.
“We think now that the central bank should start lowering the interest rate so that we encourage the private sector to take up more loans and create job opportunities,” he told MPs on Wednesday.
BMI Research- a subsidiary of Fitch Group expects at least two 50-basis points cuts to the CBK benchmark lending rate by the close of 2024 as inflation remains firmly within the target range.
“At the CBK’s next meeting, scheduled for early October, we expect that policymakers will push on with monetary easing and cut by a further 50 basis points (0.5 percent) to 12.25 percent. We expect that the CBK will continue to ease monetary policy at its final meeting of 2024 cutting by 50 basis points to 11.75 percent and will then continue to cut throughout 2025,” BMI said in a research note.
A drop is expected to trigger a fall in cost of loans for households and firms who have struggled to service costly credit since CBK started raising rates in June 2022 amid global economic shocks that saw inflation rise to multi-year highs.
Cutting the key lending rate is expected to lower the cost of borrowing as commercial lenders use the rate as a base on which they load their margins and risk profile of individuals when pricing loans.
Inflationary and exchange rate pressures forced the CBK to raise the benchmark lending rate to a high of 13 percent in February, partly to encourage foreign inflows into the economy.
Global central banks are also cutting interest rates as inflation falls across many markets offering CBK a window to also cut local rates.
Last month the US Federal Reserve cut its benchmark rate by 0.5 percent and hinted at further cuts following weakness in the labour market and easing inflation.
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