Central Bank of Kenya finally lowers benchmark rate to 10.5 per cent

Central Bank of Kenya (CBK) has relaxed its monetary policy in a measure expected to offer relief to borrowers through cheaper loans.

The decision to slash the benchmark lending rate by one per cent yesterday by the CBK Monetary Policy Committee (MPC) is informed by falling inflation that is now within the Government’s target range.

“Therefore, it (the MPC) concluded that there was policy space for an easing of monetary policy while continuing to anchor inflation expectations,” CBK Governor and chairman of the committee Patrick Njoroge said in a statement late yesterday evening. Inflation fell to 5.27 per cent in April from 6.45 per cent in March, well within the Government’s preferred band of 2.5-7.5 per cent.

The new Central Bank rate, which is used by commercial banks as the benchmark rate, is now 10.5 per cent down from the 11.5 per cent that had been retained in the past three successive meetings.

Commercial banks are typically expected to lower their lending rates following a drop in the benchmark rate. Cheaper loans are expected to translate into more borrowing, high spending and to spur the country’s recovering economy.

A lower CBR was not entirely unexpected, considering the instability of the local currency early this year, and wider push by Dr Njoroge to make credit cheaper and more accessible. Eight out of 12 analysts polled by Reuters had expected the bank to hold rates.

While the growth of credit to the private sector has remained at double-digit levels year-on-year for more than a decade, high interest rates have been cited as the single biggest reason for a good number of prospective borrowers staying away from the market.

It is the first time the MPC of the CBK considered lower rates after a sharp spike last year whose intended outcome was to discourage borrowing, while averting a further depreciation of the Kenyan shilling.

The slump in the Kenyan currency to touch a near record lows of Sh105.20 against the US dollar in 2015, was by itself a major cause of inflation considering that the country is a net importer, with petroleum and machinery topping the list of major imports.

A weaker shilling also presenting new challenges through capital flight, which was most pronounced at the stock market, where investors lost more than a fifth of their combined wealth last year alone.

The focus now shifts to commercial banks, which have been exposed to soaring bad loans partly blamed on high interest rates.