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Tuesday, December 5, 2023

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IMF warns against cutting interest rates

IMF cautions African countries against cutting interest rates over easing the rate of inflation.

The International Monetary Fund (IMF) has advised African nations whose inflation has decreased in the last two months against cutting interest rates, citing the possibility risk of a sharp rise on the cost of living when the rate cuts boost economic activity.

In the third quarter of the year, Kenya’s headline inflation rates decreased along with those of other sub-Saharan economies, mostly as a result of rate increases and declining food costs.

After reaching highs of up to 9.2 percent in the first quarter of the year, Kenya’s inflation for September was 6.78 percent. 

The Central Bank of Kenya’s (CBK) inflation target is five percent, plus or minus 2.5 percentage points.

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Since the beginning of the year, the CBK has hiked its base lending rate from 8.75 percent to 10.5 percent, with the most recent increase taking effect on June 26. This is done to keep a lid on the high inflation.

As a result, the average lending rate for banks increased to 13.5 percent in July from 12.67 percent in December 2022, while the average deposit rate increased to 8.1 percent from 7.17 percent, increasing the cost of money across the economy.

Therefore, if the base rate is maintained, borrowers can anticipate continuing to service their debt at high rates, which for the monetary authority also means less demand for loans and consequently less inflationary pressure.

“For countries with high but falling inflation, a “pause” may be warranted, with rates held at existing elevated levels (‘higher for longer’) until inflation is firmly on the path to the target,” said the IMF.

“Loosening prematurely could risk a sharp resurgence in inflation once activity rebounds,” it said in its October 2023 outlook for sub-Sahara.

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