What the US Fed's Rate Cut Means for the Kenyan Businesses and the Economy

It has long been said that when America sneezes, the world catches a cold. In other words, even the slightest of changes to the world’s largest economy can have an enormous impact on the global economy. 

Picture a stone thrown into a body of water. After the initial impact subsides, the water ripples spread outward in growing circles, like the rings of a dartboard. The strongest impact is felt at the centre, where the stone lands (the US), but it takes a bit longer for the effects to reach the edges, including countries like Kenya. 

When the US Federal Bank (Fed) announced an aggressive 0.5% cut to interest rates in September; central banks around the world were quick to follow suit by lowering interest rates in an attempt to cool inflation and stimulate their respective economies. 

Essentially, the actions of the Fed caused a domino effect, kickstarting a global easing cycle aimed at reducing inflation. So the question is, when might the positive effects of this cut be felt in Kenya, and more importantly, how could it affect your money?

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CBK cut and Loan reprieve

Experts have described the Fed cut as good news for Kenyans. According to Scott Wells, senior global market strategist at Wells Fargo, the cut “should have a positive effect on the economy and markets in 2025. We believe the global economy is likely to benefit as well, as major central banks around the world have already cut rates or are on the verge of doing so”. 

True to this prediction, the Central Bank of Kenya (CBK) recently slashed its benchmark interest rate from 12.75% to 12% (2), following on from a previous cut of 0.25% in August, the country’s largest in over four years (3). This is welcome news for Kenyan borrowers, as those who have taken on expensive loans should benefit from the lower interest rate environment, allowing them to keep more money in their pockets, rather than in the hands of the banks.

Churchill Ogutu, an economist for IC Asset Managers, emphasised not only the  “reprieve” that the interest rate cut would bring for borrowers, but the fact that there would be “some scope for the CBK to lower the policy rate further” (4), potentially resulting in even more savings for Kenyan borrowers.

Investors and Frontier Markets 

Another welcome side-effect of these cuts is that they could also spark more investment in Kenya, which would be very beneficial to the economy. According to a report by KTN News Kenya, the effect of the cut “should be positive for Kenya and most emerging markets, the capital flight that we saw last year might start reversing, so we might start seeing a lot of investors, who had gone to the US for that high yield, starting to come back to emerging and frontier markets, so we do expect to see African and foreign currencies, including the shilling, strengthening”. 

Effectively, the lower the interest rate is in the US, the cheaper it becomes to borrow US dollars and invest them in other areas to make a profit. At the same time, the lower the interest rate, the weaker the profit one can make off of USD-denominated assets. 

These two factors could see many investors turning away from the US, preferring frontier markets like Kenya, potentially bringing more business and more money into the country, as well as reducing the inflation rate.

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So what about the rest of 2024?

Another reason to be optimistic about the future of the Kenyan economy is that experts expect the global cooling cycle to continue into the end of the year, and even beyond into 2025. 

Christina Dwyer, analyst for J.P. Morgan Wealth Management, says that “the median FOMC participant is pencilling in 50 basis points of further cuts across the remaining two meetings this year, followed by 100 basis points of cuts in 2025”.

The CBK has aligned its monetary policy to echo that of the Fed, with Dr. Kamau Thugge, Chairman of the CBK’s Monetary Policy Committee saying “central banks in the major economies have continued to lower interest rates in response to easing inflationary pressures, with expectations of further reductions in the coming months”, allowing “scope for a further easing of the monetary policy stance to support economic activity, while ensuring exchange rate stability”. 

The combination of these two factors could be very good news for Kenyans. The majority of Kenyans know all too well the pain of rising inflation, which has pushed up the cost of everyday essentials, particularly food items. The rate cut is further expected to cut the cost of credit, a timely relief for individuals and businesses burdened by costly loan repayments.

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Key Takeaways

●       The influence of the US Fed is so strong that its decisions can impact markets worldwide, including the cost of everyday items in far-off countries like Kenya. 

●        The impact of the Fed’s 50 basis point cut promises to be positive for Kenyans, especially as the CBK followed suit and reduced the key lending rate by 75 basis points. Both organisations foresee further cuts taking place toward the end of the year and beyond.

●        Kenya's economy may benefit from increased business and cash flow, as investors seek better returns in frontier markets like Kenya.

●        The Fed cut is good news for Kenya all around, as it promises to cool inflation and keep more money in people’s pockets.