This archive report was first published on 27 November 2019.
On November 27, 2019, the parliamentary battle to repeal the interest rate cap came to an end, with the removal of the cap expected to have a positive impact on the economy.
The Kenya shilling appreciated significantly against the US dollar in November, despite the US dollar strengthening against other major currencies. This was a remarkable feat, with the shilling appreciating even more against the euro.
According to Scott Bellows, the appreciation of the shilling can be attributed to the removal of the interest rate cap, which will increase lending and boost the economy.
However, the removal of the cap also means that businesses will have to pay more for their debt, which may depress their earnings. Additionally, the increased demand for shilling-denominated deposits may lead to a further appreciation of the shilling.
But, the interest rate raises may slow economic growth, as individuals and businesses must pay more for debt, leading to a decline in the amount of money in circulation. This may create a shrinkage in the country's gross domestic product.
Despite this, the removal of the artificially low-interest-rate cap is expected to increase lending and boost the economy. The combination of increasing interest rates and the improvement in the economy may work to strengthen the Kenya shilling even more against other regional and global currencies in the coming months.
However, a moderating factor that may hinder economic growth is the corruption crackdown in 2019, which may have reduced the amount of money circulating in the economy.
