Kenya Raises Interest Rate, FED Sees Less Confidence For Rate Cuts

The Central Bank of Kenya (CBK) has raised the benchmark rate by 50 basis points to 13% as the monetary authority grapples with high inflation and foreign exchange pressures. This level of rate increment was last seen in September 2012 years ago.

“The proposed action will ensure that inflationary expectations remain anchored while setting inflation on a firm downward path towards the 5 percent mid-point of the target range, as well as addressing residual pressures on the exchange rate,” Dr. Kamau Thugge, Central Bank Governor of Kenya said in a statement.

The decision by Kenya’s central bank could mean that banks may start tightening credit and the cost of borrowing could increase. That is exactly what Kenya’s central bank governor implies in his statement.

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Kenya’s central bank, just like any other central bank, has a target to slow down the economy. By raising interest rates, this will increase the cost of borrowing because loans now come with higher interest rates. This makes the purchase of goods and services on credit more expensive. Consumers will decrease their spending, resulting in a slowdown of the economy.

The Monetary Policy Committee – the group that makes decisions on whether to maintain, increase, or reduce rates – in Kenya met this week at a time when inflation has risen from 6.6 percent in December 2023 to 6.9 percent in January 2024.

The hike in the cost of living has been spiked by the rise in non-vegetable food items, fuel, and electricity as well as the Kenya Shilling depreciation against the US Dollar and other hard currencies.

This whole situation has affected Kenya’s economy and in particular, the government’s plan to finance many activities. Kenya now finds itself contemplating which sustainable avenues through which it can finance its economic activities.

One of the ways on the table is to borrow from external financiers. Kenya is already paying a Eurobond whose maturity is in June this year, therefore, the government is planning to return to global markets to refinance the $2 billion.

Kenya looks to other African countries to repay its debt, and Dr Thugge said Côte d’ Ivoire’s January 2024 bond issuance and Benin’s February 2024 notes, $2.6 billion and $750 million respectively, indicate there’s no reason why Kenya can’t go to the market.

The US Federal Reserve (FED) Chair Jerome Powell gave a rare interview to 60 Minutes, which I think highlights the thought process of major central bankers at the moment when it comes to managing inflation.

There were assurances that by the end of 2023, inflation would start going down, but many have expressed concern that this might not work, although there are those who are optimistic that by the half of this year, we would start seeing inflation going down.

Powell’s insights could give a signal of what could happen from the monetary policy stance, because what happens at the FED usually reflects decisions that will be taken by other central bankers across the world and particularly in Africa.

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Here Are Excerpts from Powell’s Interview: We feel like we can approach the question of when to begin to reduce interest rates carefully. We want to see more evidence that inflation is moving sustainably down to 2%. We have some confidence in that or confidence is rising. We just need more confidence in that before we can begin cutting interest rates.

Why a 2% target? Interest rates will always include an estimate of future inflation. That estimate is 2%. That means you have 2% more than you can cut in your interest rates. The central bank will have more ammunition, and more power to fight a downturn if rates are a little bit higher.

I can’t overstate how important it is to restore price stability, by which I mean inflation is low and predictable and people don’t have to think about it in their daily lives.

If you move too fast you could see inflation settling well above our 2% target. If you move too late then the policy might be too tight and that could weigh heavily on economic activity and the labor market.

There is no easy, simple path.

In hindsight it would have been better to tighten monetary policy earlier, we thought that the economy was so dynamic that it would fix itself fairly quickly, and we thought inflation would go away fairly quickly without an intervention by us. In the fourth quarter of 2021, it became clear that inflation wasn’t transitory in the sense that I mentioned and we pivoted and started tightening.

Almost everyone in the 19-member committee on the FED Board agrees that we should cut interest rates this year.

Note: Inflation seemed a little too good in 2021. Inflation ignited after pandemic disruptions across the world and the FED spent $5 trillion to keep the U.S. economy afloat. People expressed concern that the economy would collapse and cause a disaster but when rates went up the economy added 5 million more jobs.

The prices of basic commodities such as bread have substantially increased to levels that were not seen before the pandemic, which makes sense why people are dissatisfied with where the economy is headed.

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