On Tuesday, Kenya’s central bank reduced its main interest rate for the first time in four years. The bank’s monetary policy committee (MPC) decided to lower the rate by a quarter percentage point to 12.75 percent. This decision reflects easing inflationary pressures amid ongoing challenges for the government in raising revenue and managing public debt.
The bank’s governor, Kamau Thugge, explained that the reduction in the interest rate was influenced by recent economic developments. He noted that previous measures had successfully brought overall inflation below the midpoint of the target range, stabilized the exchange rate, and managed inflationary expectations. Kenya’s annual inflation rate decreased to 4.3 percent in July from 4.6 percent in June, indicating a slowing of price increases.
The MPC’s decision to lower the interest rate was made with the goal of further easing monetary policy while maintaining exchange rate stability. This move is part of a broader strategy to address economic conditions and support the country’s financial stability.
The rate cut comes at a time when President William Ruto is dealing with significant political and economic challenges. Protests erupted in June over tax hikes, which led to violent clashes and heightened tensions. In response to public discontent and the rising cost of living, President Ruto abandoned the controversial tax increases. These tax hikes were introduced to help reduce Kenya’s substantial public debt, which stands at $78 billion, according to government records.
In late July, Kenya’s Court of Appeal also invalidated the tax increases due to procedural issues. This legal setback, combined with political instability, prompted President Ruto to overhaul his cabinet in July and work towards forming a national unity government. The interest rate cut is seen as part of the government’s efforts to stabilize the economy and address the ongoing challenges faced by the country.
