Kenya’s central bank to set rates today

The Central Bank of Kenya (CBK) will meet today to deliberate over adjustments to its interest rate. Faced with the dire economic fallout of COVID-19 and an estimated 1% contraction in 2020, the CBK is expected to marginally ease its 7% benchmark.

Although good weather conditions and falling global oil prices could rejuvenate the Kenyan economy in the medium-term—with a projected rebound of 6.1% in 2021—falling export demand, tight credit conditions and rampant youth unemployment threaten to derail domestic recovery. Liquidity-boosting measures, such as the reduction of value-added tax (VAT) from 16% to 14%, have strangled revenue growth, amplified the fiscal deficit and exacerbated the nation’s external financing needs.

To address revenue deterioration, the government recently announced a 2020-21 budget predicated on expenditure consolidation that prioritises the “Big Four”: food security, affordable housing, healthcare access and manufacturing. Given that Kenya’s current fiscal deficit amounts to 8.3% of its GDP, there is headroom to pursue a more accommodating monetary stimulus today. With inflation inching down to 5.5% last month and the cash reserve ratio lowered to 4.25%, additional easing could inject more than $330 million into commercial banks, providing much needed credit to Kenya’s flagging private sector.

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