By XN Iraki
The Central Bank of Kenya has finally cut the base-lending rate to 16.5 per cent after keeping it steady at 18 per cent for several months.
The CBK rate is used as a benchmark by commercial banks to set their rates after adding up other costs and a profit margin. CBK uses this rate as the key plank of the monetary policy.
While high rates reduce inflation by checking money in circulation and therefore reducing demand for goods and services, it also slows economic growth.
In the last one year, inflation was CBK’s biggest worry. And thanks to the high rates, Inflation has slowed down. But the soaring rate must now be reduced to stimulate economic growth, by making it easier to borrow money to either invest or consume.
Our only worry is that a reduction in the rate could trigger another bout of inflation because of increase in money supply.
That to a large extent will depend on how quickly banks adjust their own lending rates, which like other prices are “sticky” in coming down, but very smooth in going up.
Adjusted rates
Already, some banks have adjusted their rates downwards.
CBK rate cut is welcome by investors but not by the shilling — whose value decreased slightly after the cut. That was not unexpected; low rates are unlikely to attract lots of money into our economy, which come through bonds, Treasure Bills and even normal bank deposits. High interest rates encourage savings.
That decrease in flow means less demand for the local unit and hence the slight decrease in value.
When CBK cut our rate to 16. 5 per cent, the European Central Bank (ECB) cut the rate to 0.75 per cent (not an error). People’s Bank of China cut theirs to six per cent. The objective of such a cut is similar to CBK: to try and stimulate the economy by making it easier to get credit.
