Central Bank accelerates loosening cycle in April

Bank delivers larger-than-expected cut: At its meeting on 8 April, the Central Bank of Kenya (CBK) lowered its policy rate by 75 basis points to 10.00%. This reduction, the fifth consecutive, was larger than February’s half-point cut and was stronger than markets had expected. Moreover, the Bank narrowed the width of the interest rate corridor from plus or minus 1.5 percentage points to plus or minus 0.75 to enhance the stability of the interbank rate.

Risks to the growth outlook motivate decision: The Bank determined that there was scope for further rate cuts to stimulate economic activity amid a backdrop of low price pressures. The CBK estimates annual GDP growth to have slowed to 4.6% in 2024 from 5.6% in 2023. Though policymakers expect the economy to accelerate to 5.4% in 2025 as a recovery in credit growth bolsters private spending, they see significant risks to the growth outlook; in particular, the Bank highlighted heightened geopolitical risks from President Trump’s reciprocal tariffs plus conflicts in the Middle East and in Ukraine. Meanwhile, inflation remained below the midpoint of the CBK’s 2.5–7.5% target range for the 11th straight month in February. Moreover, the Bank expects this to continue in the near term amid muted demand-side pressures, lower food inflation plus currency and energy price stability, giving it more room to comfortably reduce rates.

CBK to ease its stance further ahead but at a slower pace: The Bank’s communiqué was void of explicit forward guidance. Our panelists see the Bank easing its stance further by December as they expect economic growth to undershoot the Bank’s estimate in 2025. Still, our Consensus is for inflation to rise above the midpoint of the CBK’s target in Q4; as a result, our panel has penciled in only 50 basis points of additional cuts by the end of the year. A further deterioration in the country’s fiscal metrics is an upside risk to rates. The Bank will reconvene in June 2025.

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