CBK should prioritise economic growth
By Editorial, August 6, 2024
The Kenya Bankers Association’s (KBA) call to maintain the Central Bank’s base lending rate at 13 per cent raises fundamental concerns about its impact on Kenya’s economy.
Despite signs that the economy is recovering and that key economic indicators are easing, the KBA’s stance signals the need to maintain a more cautious monetary policy approach.
While the economy has been navigating a challenging time characterised by fiscal instability, political unrest and external economic pressures, available data indicate some positive trends.
For example, inflation has dropped to 4.3 per cent as of July, the lowest since September 2020, and the Kenyan shilling has stabilised against major currencies, trading at 130 units to the US dollar, down from a high of Sh160 earlier this year.
However, these improvements mask the underlying vulnerabilities of the economy. The rejection of the 2024 Finance Bill, which was expected to generate Sh346 billion, left a significant gap in the national budget.
This shortfall, coupled with downgraded credit ratings by international agencies and under-subscription of local government bonds, underscores the fragility of Kenya’s fiscal position.
The fragile nature of the Kenyan shilling is one of the primary reasons the bankers’ lobby is urging the Central Bank to hold the base rate steady. Although the currency has shown signs of stabilising, the underlying risks remain pronounced. The exchange rate’s stability is crucial for maintaining investor confidence and ensuring that inflation remains within the target range.
A premature reduction in interest rates could lead to a depreciation of the shilling, potentially reigniting inflationary pressures and destabilising the economy. Maintaining the current rate, therefore, acts as a safeguard against these risks, ensuring that the recent gains in currency stability are not eroded.
As the CBK’s Monetary Policy Committee deliberates on these issues in its meeting today, it must weigh the competing priorities of controlling inflation, supporting growth, and managing exchange rate stability.
However, the focus must remain on achieving a sustainable balance between stability and growth. Whether CBK decides to heed the KBA’s advice or chart a different course, this decision will be crucial in shaping the economy.