Treasury warns of recession risks in fight against inflation

A businesswoman sells chapati's outside Nyayo Stadium during the Jamhuri Day Celebrations on December 12, 2022. [Elvis Ogina, Standard]

The National Treasury has warned Central Bank of Kenya’s (CBK) fight to rein in inflation could tip the battered economy into a temporary recession.

The warning comes at a time the Kamau Thugge-led CBK has made attempts to squeeze high inflation out of the economy through the toughest round of rate increases in recent years.

Treasury Cabinet Secretary Njuguna Ndung’u said yesterday despite its unintended risks of slowing the economy, the fight against inflation is a necessary evil, adding that tightening interest rates has already borne some fruits.

“The monetary policy has to be tightened to fight inflation that is emanating from supply shocks,” said Ndung’u yesterday when the National Treasury kicked off the Government budget-making process for the financial year 2024/25.

“This has its short-run consequences, it plunges the economy into a temporary recession. We have seen positive results and inflation has declined to 7.3 per cent in July 2023.” Overall, inflation in Kenya declined to 7.3 per cent in July 2023 from 7.9 per cent in June, driven by lower food and non-food non-fuel inflation. The inflation rate returned to the target range of 2.5 per cent to 7.5 per cent.

CBK paused its aggressive monetary policy stance to retain its benchmark rate at 10.50 per cent following its recent August 9 Monetary Policy Committee (MPC) meeting.

In a statement, CBK said the current monetary policy stance had reduced the threat of money-driven inflation. But the earlier tightening of liquidity by the inflation-targeting MPC triggered a negative effect on access to credit for individuals and companies.

Data by CBK indicates that there is limited private sector access to credit amid the recently hiked benchmark rate. Private sector credit grew by 12.2 per cent in the 12 months to June this year compared to 13.2 per cent in May, said CBK.

The sharp rise in interest rates, therefore, threatens to choke economic growth as it has lifted borrowing costs and encouraged cutting costs or saving over spending, investing, and hiring.

If lending dries up, that could weigh down on the value of stocks, real estate and other assets besides crimping overall demand—a recipe for a painful recession.