The Central Bank of Kenya (CBK) has lowered its benchmark lending rate by 0.5 percent to 8.5 percent, days after the interest rate cap was repealed.
The last time the benchmark lending rate was lowered was in 2008, and has remained at 9 percent since then.
According to the Monetary Policy Committee (MPC), the economy is operating below its potential, the reason the rates were reviewed.
“The MPC noted that inflation expectations remained well anchored within the target range and assessed that the economy was operating below its potential level. Furthermore, the committee noted the ongoing tightening of fiscal policy and concluded there was room for accommodative monetary policy to support economic activity,” said CBK Governor Patrick Njoroge.
If Kenya had a controlled regime where lending rates are determined by the government, banks would have charged interest rates of 12.5 per cent as the law required lenders to price loans at four percentage points above the Central Bank rates.
However, in the current environment for Kenya, banks will not be obligated to review their current rates.
Following the repeal of the rate cap, high risk borrowers like individuals and SMEs will now easily access loans from banks, but at a higher rate, probably three points higher to cater for non-performing loans (NPLs).
During the rate cap regime, banks shied away from lending high risk borrowers, with the CBK now optimistic that the repeal will enhance cash flow in the country.
“This reform should restore the clarity of monetary policy decisions and strengthen the transmission of monetary policy,” added Njoroge.