Central Bank of Kenya Cuts Benchmark Lending Rate

By George Obulutsa

NAIROBI (Reuters) – Kenya's central bank slashed its benchmark lending rate to 12.00% from 12.75% on Tuesday, aiming to stimulate credit to the private sector, as stated by the bank's monetary policy committee (MPC).

The cut follows a 25 basis-point reduction in August, marking the first reduction in approximately four years. The bank also revised its economic growth forecast for 2024, attributing the adjustment to a slowdown in the second quarter.

>The MPC noted the sharp deceleration in credit to the private sector and the slowdown in growth in Q2 2024, concluding that further easing of monetary policy was feasible.

Last week, Finance Minister John Mbadi indicated that the central bank should lower its lending rate due to declining inflation.

Inflation decreased to 3.6% year-on-year in September from 4.4% a month earlier, remaining within the government's preferred band of 2.5%-7.5%.

Prior to the rate decision, the Kenya Bankers' Association highlighted in a research note on Oct. 3 that there was potential for a significant rate cut to bolster economic growth and enhance private sector credit recovery.

The bank adjusted its growth forecast for 2024 down to 5.1% from 5.4%, following a slowdown in Q2 growth, which was 4.6% year-on-year compared to 5.6% the previous year. However, it expects the economy to grow by 5.5% in 2025.

>The resilience of key service sectors, robust agricultural performance, and improved exports are expected to continue supporting growth.

Kenya's shilling has appreciated over 21% against the dollar this year, following a rally initiated in February with the government's sale of a $1.5 billion Eurobond to buy back a majority of a $2 billion bond that matured in June, which had unsettled investors.

The central bank confirmed it has adequate foreign exchange reserves of $8.25 billion to buffer against any short-term shocks in the foreign exchange market.