Relief for Borrowers as CBK Reduces Rates After Four Years

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Bank borrowers will now breathe a sigh of relief as interest on bank loans is set to decrease. This comes after the Central Bank’s Monetary Policy Committee (MPC) reduced the Central Bank Rate (CBR) from 13% to 12.7%. It follows years of high interest rates in an effort to contain inflation and shilling depreciation.

The MPC decision was based on an improved global economic outlook and the resilience of domestic growth. It also marked its first interest rate cut in four years, reducing the policy rate by 25 basis points.

“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 percent,” CBK noted in a statement following the Monetary Policy Committee sitting.

The committee observed a decline in inflation and noted that major economies’ central banks had initiated interest rate cuts in response to easing inflationary pressures, with indications that other central banks would follow suit.

Since the CBK increased its lending rate, inflation has gone down significantly, from a high of 8.1 percent in October 2023 to 4.3 percent in July 2024, according to the Kenya National Bureau of Statistics.

Additionally, the Kenyan shilling has gained value against the US Dollar, after the latter peaked at its all-time high of Sh 160 in February. The shilling currently stands at 129 against the dollar.

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The Central Bank of Kenya (CBK) primarily controls the CBR through monetary policy tools, including open market operations, cash reserve requirements, and the discount rate.

The CBK influences the overall cost of money in the economy by buying or selling government securities, adjusting the amount of funds banks must hold in reserve, or altering the interest rate at which it lends to commercial banks,.

A lower CBR typically leads to reduced interest rates on bank loans, making borrowing more affordable for individuals and businesses. This stimulates economic growth by encouraging investment and consumption, ultimately benefiting borrowers through increased purchasing power and financial flexibility.

The CBK last reduced its benchmark rate in March 2020, as the global Covid-19 pandemic triggered a severe economic downturn, characterized by rising living costs and widespread cash shortages that affected all sectors of the economy.