Kenya risks economic recession over inflation, Treasury warns
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Treasury warns Central Bank of Kenya (CBK) the risk of recession over its fight against high inflation in the country
Treasury warns Central Bank of Kenya (CBK) the risk of recession over its fight against high inflation in the country.
The battered economy may temporarily enter a recession, according to a warning from the National Treasury over the Central Bank of Kenya’s (CBK) efforts to control inflation.
The warning comes at a time when CBK Governor Kamau Thugge is attempting to drain the economy of excessive inflation by enacting the most strenuous series of rate rises.
Treasury Cabinet Secretary Njuguna Ndung’u stated that despite the unforeseen consequences of slowing the economy, fighting inflation is a necessary evil that has already yielded some results.
“The monetary policy has to be tightened to fight inflation that is emanating from supply shocks,” said Ndung’u yesterday when the National Treasury kicked off the Government budget-making process for the financial year 2024/25.
“This has its short-run consequences, it plunges the economy into a temporary recession. We have seen positive results and inflation has declined to 7.3 percent in July 2023.” Overall, inflation in Kenya declined to 7.3 percent in July 2023 from 7.9 percent in June, driven by lower food and non-food non-fuel inflation. The inflation rate returned to the target range of 2.5 percent to 7.5 percent.
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CBK paused its aggressive monetary policy stance to retain its benchmark rate at 10.50 percent following its recent August 9 Monetary Policy Committee (MPC) meeting.
The current monetary policy posture, according to CBK, has lessened the risk of inflation caused by money. However, the inflation-targeting MPC’s earlier tightening of liquidity had a negative impact on both people’s and businesses’ access to credit.
Data by CBK indicates that there is limited private sector access to credit amid the recently hiked benchmark rate. Private sector credit grew by 12.2 percent in the 12 months to June this year compared to 13.2 percent in May, said CBK.
The sharp rise in interest rates, therefore, threatens to choke economic growth as it has lifted borrowing costs and encouraged cutting costs or saving over spending, investing, and hiring.
If lending dries up, that could weigh down on the value of stocks, real estate, and other assets besides crimping overall demand—a recipe for a painful recession.
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