Charges on bank loans are set to drop after the Central Bank of Kenya reduced the benchmark lending rate from 12.75% to 12%. This decision, announced by the Monetary Policy Committee (MPC), marks the largest interest rate cut since the start of the COVID-19 pandemic in March 2020.
The CBK’s rate cut was prompted by a significant decline in inflation, which has dropped to its lowest level in over a decade.
“The MPC noted that overall inflation has declined further and is expected to remain below the midpoint target range in the near-term, supported by stable food inflation attributable to improved supply from the ongoing harvests, a stable exchange rate and lower fuel inflation,” CBK said in a statement on Tuesday.
Furthermore, the reduction in lending rates was also influenced by a slowdown in private sector growth during Q2 2024, with growth slowing to 1.3% in August, down from 3.7% in June. The CBK also reported an increase in gross non-performing loans, which rose to 16.7% in August from 16.3% in June.
“The MPC also noted a sharp deceleration in credit to the private sector, and the slowdown in growth in the second quarter of 2024, and concluded that there was scope for a further easing of the monetary policy stance to support economic activity.” the statement further noted.
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The reduction in the benchmark interest rate is expected to lower borrowing costs for individuals and institutions, who have struggled with expensive credit since the CBK began raising rates in 2022 in response to economic shocks that drove inflation to multi-year highs.
The Kenyan Shilling has shown stability, appreciating by 17.4% since the start of the year, recovering from a low of 160 in February. This gain can be attributed to several factors, including the lingering effects of the tightened monetary policy in late 2023, the successful Eurobond buyback in February, the settlement of the June sovereign debt maturity, and an increase in foreign direct investment.
Previously, persistent inflation and a weakening shilling led the Central Bank of Kenya (CBK) to raise the key lending rate from 10.5% to 12.5% in December 2023, followed by another increase to 13% in February 2024. The current decline in rates signals the start of an easing cycle, reflecting trends seen in other emerging markets globally. Analysts predict that with the rate-cutting cycle expected to continue into 2025, lending rates will likely see more significant reductions by early 2025, boosting private sector borrowing.