Kenyan equities are facing a tough outlook, with the NSE20 index likely to continue its downward trajectory following a near one percent decline last Friday.
The market’s pressure is amplified by recent inflation data, which showed a slight increase to 2.8% year-on-year in November, up from 2.7% in October. Additionally, monthly inflation rose to 0.3%, from 0.2% the previous month, signaling some strain on the economy. Despite this uptick, Kenya’s inflation remains within the Central Bank of Kenya’s (CBK) target range of 2.5% to 7.5%, but the economic pressures could weigh heavily on market sentiment.
The key focus for investors will be the CBK’s upcoming decision on the benchmark lending rate, scheduled for December 5. Following the rate cut in October, the market is expected to maintain a cautious stance in the near term, with inflationary concerns continuing to limit recovery. The medium-term outlook remains bearish for Kenyan financial markets, as ongoing inflationary pressures could dampen investor sentiment and hinder any significant equity market recovery.
In the banking sector, the situation is equally challenging. Despite the CBK’s efforts to encourage lower borrowing costs, nearly half of Kenya’s commercial banks – 17 out of 38 – did not reduce their lending rates in October. The average lending rate slightly decreased to 16.87%, from 16.9% in September, but some banks, such as KCB and Co-operative Bank, even raised rates. These mixed responses to the CBK’s rate adjustments suggest the central bank’s efforts are being thwarted by high returns from government securities and a rising number of non-performing loans (NPLs), which could further hinder growth in the financial sector.
Although there are ongoing discussions between the CBK and bank executives to support private sector credit, the slow pace of credit growth remains a concern. Credit growth hit a 22-year low in September, highlighting the challenges faced by businesses and consumers. While expectations for another rate cut could help ease borrowing costs, the financial market outlook remains subdued in the short term, with a possibility of moderate recovery in the medium term if credit conditions improve.
As investors navigate these economic challenges, the outlook for Kenya’s financial markets remains cautious, with inflationary pressures and mixed banking sector responses likely to continue shaping market sentiment in the near future.
