The Kenyan shilling has appreciated by 17% year-to-date against the US dollar, as the Central Bank of Kenya (CBK) reduced its benchmark interest rate for the second time in a row, following a significant decline in inflation.
In September, the Kenya National Bureau of Statistics (KNBS) reported that inflation had decreased by 80 basis points, reaching 3.6%, down from 4.4% in the previous month.
This decline influenced the central bank’s decision to cut interest rates further.
Amid decreasing inflation and a stable macroeconomic environment, the Kenyan shilling has appreciated by 17%, recovering from 160 KES per dollar in January.
Market Trends
The Kenyan shilling has demonstrated robust appreciation throughout 2024, a sharp turnaround after months of consecutive depreciation in 2023, during which it lost 29% of its value against the dollar.
After reaching a low of 160 KES per dollar in January 2024, the currency began to recover in February, regaining around 8% of its losses. By March, it had strengthened further, trading at about 131 KES, representing a 17% gain against the dollar.
Amid ongoing reports of easing inflation, the shilling continued to strengthen, stabilizing below 129 KES by October.
Possible Drivers of Positive Sentiment
The currency’s January dip to 160 KES marked its lowest point, but it began to recover as inflation fell to 6.3% in February, down from 6.9% in January, driven by lower prices for food, non-alcoholic beverages, housing, and utilities.
This improvement coincided with an 8% appreciation in the shilling, and by March, as inflation further eased to 5.7%, the currency had strengthened to 131 KES. From March through August, declining costs for food and transportation contributed to a further drop in inflation to 4.4%.
On August 6, 2024, the Central Bank of Kenya’s Monetary Policy Committee (MPC) lowered the Central Bank Rate (CBR) by 25 basis points, from 13.0% to 12.75%, in response to easing inflation and the shilling’s appreciation beyond the 130 KES mark.
More recently, CBK reduced the key rate again, down to 12% from 12.75%, aiming to boost private sector lending and facilitate easier borrowing.
These factors appear to have driven the Kenyan shilling’s recovery since January, keeping it strong through October 2024.
Statements
Finance Minister remarks that the resilience of key service sectors, a solid agricultural performance, and improved exports are expected to continue supporting Kenya’s growth.
The CBK also noted, “The MPC… observed the sharp deceleration in credit to the private sector and the slowdown in growth in the second quarter of 2024, concluding that there was room for further easing of monetary policy.”
Lowering interest rates to enhance credit access for the private sector could stimulate economic activity more, providing additional support to the local currency.
