(Bloomberg) — Kenya’s central bank cut the benchmark interest rate to an almost two-year low as benign inflation allowed it to prop up its stuttering economy.
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The monetary policy committee lowered the key rate to 10.75% from 11.25%, Governor Kamau Thugge said in an emailed statement Wednesday. That matched the median estimate of seven economists in a Bloomberg survey.
The MPC reduced the rate as inflation is expected to remain below the 5% midpoint of the central bank’s target range in the near term, “supported by a low and stable core inflation, low energy prices inflation, and exchange rate stability,” Thugge said in an emailed statement.
The shilling has flatlined at 129 shillings per dollar for the past six months, and was the world’s best performing currency last year. That’s helped keep inflation below 5% for the past eight months. It quickened to 3.3% in January from 3% a month earlier. Core inflation, which strips out food and energy, slowed to 2%, from 2.2% in December, highlighting muted demand.
The decision was also taken to support economic activity, after growth decelerated last year, while ensuring exchange rate stability, Thugge said. The economy likely grew 4.6% last year, compared with 5.6% in 2023, he said. It’s expected to pick up in 2025 and expand 5.4%, he added.
The wide gap between headline inflation and the benchmark rate also gave the committee room to ease, even as central banks across the world adopt a cautious stance amid uncertainty wrought by US President Donald Trump’s policies.
While Trump’s America First agenda has hurt emerging-market currencies, an ongoing sale of tax-free infrastructure bonds, which are popular with foreign investors, is likely to ramp up dollar inflows into Kenya.
Program inflows from the World Bank and the International Monetary Fund are expected to boost Kenya’s foreign-exchange reserves, in addition to a partial drawdown of a $1.5 billion loan from Abu Dhabi.
Still, Kenya has a steep external debt wall to scale. The nation requires $4.56 billion for interest payments and maturing foreign debt in the fiscal year ending June, according to the Treasury, and will have to borrow a net $2.7 billion offshore to plug its 4.3% budget deficit.
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