In a move to ease the financial burden on borrowers, the Central Bank of Kenya (CBK) has reduced the lending rate by 0.25 per cent, setting it at 12.75 per cent.
This marks the first rate cut since March 2020, signalling a significant shift in the country's monetary policy. The decision, announced on Tuesday, August 6, by CBK Governor Kamau Thugge, reflects a cautious yet optimistic outlook on Kenya's economic landscape.
The Monetary Policy Committee (MPC) of the CBK made the decision despite pressure from the banking sector to maintain the rate at 13 per cent.
This reduction comes on the heels of seven consecutive rate hikes since May 2022, a period during which the country grappled with high inflation and a volatile shilling.
Governor Thugge highlighted the MPC's rationale, stating, “The MPC concluded that there was scope for a gradual easing of the monetary policy stance, while ensuring continued exchange rate stability. Therefore, the Committee decided to lower the Central Bank Rate (CBR) to 12.75 per cent.”
This decision aims to support economic growth by making borrowing more affordable while maintaining a stable exchange rate.
The reduction in the lending rate coincides with Kenya's inflation rate falling to its lowest level in over three years. According to the Kenya National Bureau of Statistics (KNBS), the overall inflation eased to 4.3 per cent in July, down from 4.6 per cent in June.
Such a large decline has been linked to the Kenyan shilling's strong performance, which has helped lower transportation costs and contributed to overall price stability.
Economic analysts have noted that the easing inflationary pressures in Kenya are in line with global trends. Central banks in several major economies have also lowered interest rates recently, reflecting a broader shift towards more accommodative monetary policies. The MPC acknowledged this trend, noting that other central banks might soon follow suit.
What it means: The CBK's decision to lower the lending rate is expected to have several positive effects on the economy. By reducing the cost of borrowing, businesses and consumers will have greater access to credit, potentially spurring investment and consumption. Additionally, the move is likely to enhance financial stability by supporting the shilling and anchoring inflationary expectations.
However, the decision has not been without controversy. The Kenya Bankers Association (KBA) had urged the CBK to maintain the benchmark rate at 13 per cent, arguing that the recent rate hikes' effects were still filtering through the economy.
In a research note, the KBA stated, “Considering these developments, and the balance of risks, we argue that maintaining the current monetary policy stance – in keeping the CBR unchanged at 13.0 per cent – would be appropriate.”
The CBR guides the rate at which the Central Bank lends to commercial banks, influencing the rates they offer to customers.
This latest reduction aims to lower loan costs for domestic borrowers, who have struggled to service loans since rate hikes began in June 2022 amid global economic shocks and soaring inflation.
High CBR levels, coupled with inflation and increased taxes, led to a surge in loan and mortgage defaults, with commercial bank lending rates reaching up to 18 percent.
MPC's Rational: Despite these concerns, the MPC believes that the current economic conditions justify a more accommodative stance. The committee emphasised that it would closely monitor the impact of the new policy measures and remain ready to take further action if necessary. The next MPC meeting is scheduled for October 2024, where the committee will review the situation and decide on any additional policy adjustments.
As Kenyans digest the implications of the new lending rate, the focus will shift to how the policy change will impact various sectors of the economy.
The agricultural sector, which relies heavily on credit for inputs and infrastructure, stands to benefit significantly. Small and medium-sized enterprises (SMEs), which are the backbone of the Kenyan economy, are also expected to experience a boost.
