Bankers are urging the Central Bank of Kenya’s Monetary Policy Committee (MPC) to maintain the benchmark interest rate at its current level of 13 percent during the upcoming review meeting scheduled for June 5, 2024. This call comes in the wake of favourable economic indicators and easing inflation figures.

In a statement on Thursday, the Kenya Bankers Association said the country’s inflation remains within the target range. Notably, the inflation rate declined to 5 percent in April according to official statistics from the Kenya National Bureau of Statistics (KNBS), attributable to reductions in both fuel and food inflation.

In particular, fuel inflation’s contribution to overall inflation dropped from 2.5 percentage points in March to 1.8 percentage points in April, as the energy sector regulator cut pump prices.

Similarly, food inflation saw a marginal decline due to improved rainfall and resultant price drops for key food items such as loose maize grain, cabbages, tomatoes, white wheat flour, sugar, and Irish potatoes.

While calling for maintaining the benchmark interest rate at 13 percent, the bankers cited strong underlying economic growth momentum carried over from 2023, when the economy expanded by 5.6 percent, compared to 4.9 percent in 2022.

This growth was largely powered by a rebound in agriculture and service-oriented sectors, which grew by 6.5 percent and 7 percent respectively. In the year the accommodation and food service sector expanded by 33.6 percent, spurred by a recovery in the tourism business.

Additionally, the bankers said credit growth remains robust despite concerns over deteriorating asset quality due to the hit sustained because of the high-interest rate regime and the projected negative impact of the Finance Bill 2024 on financial services.

The latest data shows that private sector credit growth continues to grow at a double-digit rate, though it eased from 13.8 percent in January to 10.3 percent in February 2024 on a YoY basis.

This growth has been particularly strong in the agricultural industry (32.5 percent), manufacturing (23.1 percent), transport and communication (16.6 percent), and trade (12.9 percent).

However, the bankers are cautious about the rising ratio of non-performing loans to gross loans, which increased to 15.5 percent in February from 15.1 percent in January 2024 and 14.8 percent at the end of 2023.

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Non-performing loans

This rise in NPLs is a result of non-performing loans in real estate, trade, personal and household, energy and water, and building and construction.

Additionally, the banking industry noted favourable improvements and stability in the external sector while making their case for maintaining the rate at 13 percent.

The Kenya Shilling has gained ground against the US Dollar, appreciating by 18.7 percent from its peak of Kes161.36 per US dollar on January 23, 2024, to an average of Kes131.2 per US dollar as of May 21, 2024.

This appreciation is backed by improved macroeconomic fundamentals such as a narrowing current account deficit and resilient remittances, which rose by 24 percent year-on-year in April this year.

Kenya’s current account deficit narrowed to US$4.31 billion in January this year from US$5.6 billion in a similar month last year.

"In view of these developments, and a balance of risks, we argue that maintaining the current monetary policy stance – in keeping the CBR unchanged at 13.0 percent - would be appropriate. This would facilitate a complete pass-through of previous monetary policy actions and avert any disruptions," the Kenya Bankers Association said.

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