By Judy Maina
NAIROBI — In a significant move Tuesday, Kenya’s central bank trimmed its main interest rate for the first time in four years, citing easing inflationary pressures.
The decision comes as the government grapples with revenue shortfalls and a mounting public debt crisis, exacerbated by deadly protests over recent tax hikes.
The Central Bank of Kenya’s Monetary Policy Committee (MPC) reduced the main interest rate by a quarter percentage point to 12.75%.
“The MPC noted that its previous measures have lowered overall inflation to below the mid-point of the target range, stabilized the exchange rate, and anchored inflationary expectations,” said Kamau Thugge, the bank’s governor and chairman of the MPC, in a statement.
“The MPC concluded that there was scope for a gradual easing of the monetary policy stance, while ensuring continued exchange rate stability.”
This rate cut comes at a pivotal moment for Kenyan President William Ruto, who is seeking to navigate the worst crisis of his near-two year presidency.
Violent protests erupted in June over tax hikes introduced amidst a cost-of-living crisis.
In response, Ruto scrapped the unpopular tax increases that were intended to reduce the public debt, which stands at $78 billion according to treasury records. Additionally, he has made political overtures by bringing allies of his rival, Raila Odinga, into the cabinet.
Further complicating matters, Kenya’s Court of Appeal annulled the controversial tax hikes from 2023 at the end of July due to procedural issues.
In a bid to form a national unity government, Ruto dismissed most of his cabinet in July. The country’s budget deficit has widened due to the failure to implement revenue measures expected to raise KSh346 billion ($2.7 billion).
This shortfall jeopardizes Kenya’s agreement with the International Monetary Fund (IMF), which had backed Kenya’s plan to reduce the budget deficit from 5.7% of GDP to 3.3%.
The revised revenue outlook now estimates the fiscal deficit at 4.3% of GDP.
The central bank’s decision to cut interest rates underscores the delicate balancing act faced by Kenya’s policymakers as they attempt to stimulate economic growth while managing fiscal constraints and public unrest.
The writer of this story can be reached at: judy.maina@alleastafrica.com
