The World Bank has cautioned African central banks against rapid easing of monetary policy due to the risk of inflation and exchange rate volatility, on the back of global economic uncertainty after the US hit its trade partners with tariffs on imports.
Easing inflation in recent months opened a window for African countries to start lowering interest rates to stimulate economic growth, while external financing conditions also improved as rates in developed economies came down in line with their inflation rates.
The World Bank is, however, warning that likely inflationary effects of more restrictive trade policies around the world due to the US tariffs may pause and delay the monetary policy, easing that started in major economies in the second half of 2024.
This will call for a fine balancing act in the coming months for smaller economies which need to support economic growth, while keeping a lid on inflationary pressure filtering through from the global markets.
“Higher-for-longer interest rates in the United States could strengthen the dollar and heighten the risk for weaker currencies in Africa. In this context, central banks need to anchor expectations within inflation target bands (South Africa) and/or keep monetary policy tightened if inflation remains sticky (Ghana and Nigeria),” said the World Bank in its April 2025 Africa’s Pulse report.
“Other countries with scope to ease monetary policy may do so prudently as long as inflation remains low (Kenya and Mozambique). Overall, safeguarding stability to boost growth would require the adoption of policies to prevent or cope with risks and strengthen resilience in the face of uncertainty.”
In the case of Kenya, the Central Bank has cut its base rate in five straight monetary policy committee meetings since August 2024, bringing it down from 13 percent to 10 percent.
The CBK has been cutting the rate in a bid to stimulate growth in lending to the private sector, which stood at a modest 0.2 percent in the 12 months to March 2025, recovering from a contraction of 1.3 percent in February.
At the same time, banks have seen a steady rise in the volume of bad loans on their books, exposing the difficult economic environment facing businesses and households in a high interest rate environment.
CBK data shows that the ratio of gross non-performing loans (NPLs) to gross loans stood at 17.2 percent in February 2025 compared to 16.4 percent in December 2024, with the real estate, personal and household, trade, building and construction, and manufacturing sectors the worst hit.
Analysts have said that the CBK has further room to cut its rate and stimulate banks’ lending given that inflation has stabilised below the preferred midpoint of five percent since July 2024, and the shilling’s exchange rate versus the dollar has held at the Sh129 level since August last year.
At the same time, the interest rates on government securities have come down sharply in line with the central bank rate cut, potentially reducing the competition between the government and private sector for bank loans.
On the short end of government debt, Treasury bill rates have now fallen to between 8.44 and 10.02 percent in the latest auction held last week, from highs of between 16.73 and 16.99 percent before the CBK began cutting its rate last August.
