By David Herbling

(Bloomberg) — Kenya’s central bank surprised financial markets by cutting its benchmark interest rate for the first time since early 2020, providing some respite to consumers who have become increasingly frustrated by the high cost of living.

The monetary policy committee lowered the key rate to 12.75% from 13%, Governor Kamau Thugge said in an emailed statement Tuesday. Only one of nine economists in a Bloomberg survey predicted the move.

Yields on government bonds due 2031 eased 4 basis points to 11.55% by 6:51 pm in Nairobi, the first drop after three consecutive days of gains.

Policymakers acted because “overall inflation is expected to remain below the midpoint of the target range in the near term, supported by a stable exchange rate, lower food prices with expected harvests, and stable fuel prices,” Thugge said. 

The East African nation is among a small group of African central banks including Mozambique and Morocco to cut interest rates this year. Its decision is supported by annual inflation slowing to a four-year low of 4.3% in July as the strong shilling helped to cool the prices of key imports such as some food items and fuel. That’s well below the 5% midpoint of the central bank’s target range at which it seeks to anchor price-growth expectations. 

The shilling has rallied 20% against the dollar this year, making it the second best performing currency in the world, according to data compiled by Bloomberg. The gains are partly driven by the refinancing of Kenya’s June 2024 dollar eurobond and the approval of loans from the World Bank and International Monetary Fund. 

The decision will be welcomed by Kenyans who have been unnerved by the cost-of-living crisis. In June thousands demonstrated against a tax bill that they believed would onerously increase prices.

The deadly protests led President William Ruto to scrap the bill and reconstitute his cabinet with members of the opposition. The proposed taxes on everything from bread to motor vehicles to mobile money were aimed at improving state finances, necessary to access more IMF financing.

The government has since said it will make up the revenue shortfall by paring back its budget and increasing its borrowing. 

In a supplementary budget, the National Treasury widened the fiscal deficit to 4.2% of gross domestic product in the year through June 2025 from the 3.3% that was anticipated in its initial spending plans presented with the tax changes. 

–With assistance from Simbarashe Gumbo.

Source: Bloomberg