Borrowers can now look forward to some financial relief as the interest rates on bank loans are set to decrease. This follows a decision by the Central Bank’s Monetary Policy Committee (MPC) to lower the Central Bank Rate (CBR) from 13% to 12.75%.
The MPC’s decision was influenced by a more optimistic global economic outlook and the robustness of domestic economic growth. This rate cut, the first in four years, reduces 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,” the Central Bank of Kenya (CBK) stated following the MPC meeting.
The committee noted a decrease in inflation and observed that central banks in major economies had started reducing interest rates in response to diminishing inflationary pressures, with other central banks expected to follow suit. This comes after a prolonged period of high interest rates aimed at controlling inflation and stabilizing the shilling.
Since the CBK raised its lending rate, inflation has significantly decreased, from a peak 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 appreciated against the US Dollar, after the dollar peaked at an all-time high of Sh 160 in February. The shilling is currently valued at 129 against the dollar.
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The Central Bank of Kenya (CBK) manages the CBR primarily through monetary policy tools, including open market operations, cash reserve requirements, and the discount rate.
By buying or selling government securities, adjusting the reserve requirements for banks, or changing the interest rate at which it lends to commercial banks, the CBK influences the overall cost of money in the economy.
A lower CBR generally results in reduced interest rates on bank loans, making borrowing more affordable for individuals and businesses. This, in turn, stimulates economic growth by encouraging investment and consumption, ultimately benefiting borrowers through increased purchasing power and financial flexibility.
The CBK last lowered its benchmark rate in March 2020 in response to the global economic downturn caused by the Covid-19 pandemic, which led to rising living costs and widespread cash shortages affecting all economic sectors.