Thugge: Tackling Kenya's budget deficit requires bold action

Kenya's Central Bank Governor, Kamau Thugge, recently spoke about the country's stable economy despite rising financing conditions. Thugge emphasized that monetary tightening was crucial to helping the National Treasury achieve further fiscal consolidation. In a TV interview on CNBC Africa, he addressed concerns about when the Central Bank Rate (CBR) would be lowered, highlighting the importance of global economic developments in the decision-making process. Thugge pointed to the stickiness of inflation rates globally, using the example of the United States where inflation rates have been slow to decrease. This delay has led to a postponement in reducing policy rates in advanced economies, indicating that international interest rates may remain higher for an extended period. Thugge emphasized the need for caution in adjusting interest rates in Kenya to avoid widening the interest rate differentials between Kenya and advanced economies, which could lead to capital outflows and currency depreciation. He noted that such pressures could result in imported inflation and higher fuel prices, necessitating a return to raising interest rates to address inflationary pressures and exchange rate challenges. Thugge stressed the importance of monitoring external developments to determine the appropriate time for adjusting the CBR. Despite this cautious approach, he mentioned the potential for interest rates on treasuries and bonds to adjust without changes to the CBR, citing the impact of lowering the fiscal deficit to 2.9% of GDP on government domestic borrowing. Thugge urged progress in achieving this fiscal target to help reduce interest rates on government securities. He also discussed the need for discussions with the Treasury regarding a buyback initiative for the second year and the ongoing update of the Payments Act to regulate payment service providers (PSPs). Thugge highlighted the importance of finalizing the new regulations to guide the payment service providers' space.