What’s at stake as Kenya walks monetary policy tightrope

All eyes are on December 5, 2024. With the recent appointment of four external members to the Central Bank of Kenya’s Monetary Policy Committee (MPC), the meeting date being their inaugural policy decision will be more than symbolic—it will also set the tone for Kenya’s economic direction heading into 2025.

The MPC convenes for its sixth and final meeting of the year, staying true to its bi-monthly schedule.

Since its October meeting, key indicators have continued to reflect a steady path, providing a backdrop of stability as the committee makes its final policy decision of the year. The question in every Kenyans mind is: should monetary policy err on the side of stability, or stimulus?

First, the inflation rate has steadily declined, falling to a remarkable 2.7 percent in October, its lowest level in years —well below the government’s target mid-point of 5 percent. This hard-won stability is no accident, and the recent easing of the policy rate has successfully anchored inflationary expectations.

Second, the external sector is also stable. The shilling has also stabilised, trading at Sh129.52 per US dollar as of November 2, bolstered by foreign exchange reserves of $9.144 billion—equivalent to 4.7 months of import cover, and well above the statutory threshold of four months of import cover.

But stability is cold comfort for Kenya’s struggling private sector. Credit, a critical engine for job creation and investment, has collapsed with the private sector experiencing a persistent credit squeeze as evidenced by the near-flat trajectory of credit growth which stood at 2.6 percent in September.

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High lending rates—averaging 16.9 percent in September—have created a credit market disconnected. While falling inflation and policy rate adjustments should ideally have created room for more affordable credit, commercial banks remain cautious, reflecting heightened risk perceptions amid growing non-performing loans (NPLs) at 16.7 percent in August.

The result is a vicious cycle: high borrowing costs and limited access to credit have stifled business expansion and weakened demand for goods and services.

Similarly, while stability is reassuring, Kenya’s economic engine is sputtering. GDP growth slowed to 4.6 percent in the second quarter of 2024, down from 5.6 percent a year earlier.

Encouragingly, the Purchasing Managers’ Index (PMI) shows there are signs of recovery with the PMI rising to 50.4 in October, signalling a marginal improvement in the economy. However, the recovery is uneven, with manufacturing and services contracting during the same period.

The December 5 MPC’ decision will hinge on how it balances all moving parts. Will it err on the side of caution, prioritising stability? Or will it take a growth-focused approach, slashing rates further to inject much-needed liquidity into the private sector? The challenge lies in striking a balance.

Whichever direction, their choice will have far-reaching consequences. For the average Kenyan, this decision hits close to home, influencing everything from the cost of borrowing to the strength of the shilling when paying for imports.