In brief
- The Central Bank of Kenya (CBK) lowered the Central Bank Rate (CBR) by 25bps to 12.75% in its August 2024 MPC meeting and in line with our overall cut expectation. With inflation having trended to comfort levels and a stable exchange rate, the downward calibration of the policy rate is more than welcome.
- Inflation is expected to remain anchored below the mid-point target of 4.5% in the short-term horizon. The July 2024 headline inflation extended the disinflation trend that has played its course this year. Going forward, stability of the exchange rate, improved food supply and lower fuel prices will act as anchors to a low and steady inflation environment.
- The CBK emphasized that there has been no intervention to support KES against the US dollar, with the stability in FX reserves. This notwithstanding, it is of importance to note that FX interbank trading volumes has normalized post the outsized levels witnessed in February-March 2024 period.
- Noticeably, there has been a preference to fund banks’ liquidity position via reverse repo by the CBK, as opposed to horizontal repo transactions between banks even with the introduction of the Central Securities Depository. This year, the average 7-day reverse repo daily volume has been KES 34.2bn against KES 1.5bn in horizontal repo transactions. We opine that this should reverse gradually as the CBK implements rate cuts in this easing cycle.
- With domestic financing outturn in FY24 at KES 589.6bn, our expectations are that rates will chart a downtrend this FY25 with a much lower domestic borrowing target of KES 412.8bn. The authorities expect the rate cut, and subsequent easing, to bring domestic yields lower. Higher concessional financing, from bilateral and/or multilateral sources, should it come to fruition will also reduce FY25 domestic borrowing target and sustain the interest rate decline.
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