Relief as CBK lowers lending rate to 16.5pc

• Move likely to lead to drop in interest rates by banks, less monthly repayments and mortgage dues

Borrowers will sigh with relief following Thursday’s downward review of the Central Bank indicative lending rate to 16.5 per cent.

The review, the first in seven months from a high of 18 per cent, sets the stage for lowering of lending rates by commercial banks, reducing the monthly repayments by borrowers and making available cheaper credit to those in need of new funding.

In a statement to the press, Central Bank Governor and chairman of the Monetary Policy Committee, Prof Njuguna Ndung’u, said they decided to lower the CBR following positive movement in inflation and stabilisation of exchange rates.

“We expect commercial banks to follow suit in the medium term,” Kenyan Bankers Association chief executive Habil Olaka told Nation after the announcement of the rate cut.

The MPC raised the rate to 18 per cent in December last year and has retained it through the past six meetings in efforts to tame runaway inflation and support the shilling, which took the worst beating in October, changing at Sh107 to the US dollar.

The Central Bank’s decision on Thursday could signal to the end of a high interest regime but it is the speed at which commercial banks react that will dictate how soon borrowers can enjoy more affordable credit.

“We expect market reaction to the rate cut to be overwhelmingly positive,” Ms Razia Khan, head of research, Africa, Standard Chartered Bank, noted in her commentary sent to media houses.

Pinebridge senior investment manager Edward Gitahi said the MPC’s decision was driven by the fact that inflation has declined significantly towards a single digit.

“It is now less of a risk factor that the shilling could weaken than it was earlier because the foreign reserves can be used to stabilise the currency. This is why the MPC can afford to cut the rate,” said Mr Gitahi.

However, Reuters reported shortly after the announcement that the shilling weakened in Thursday’s after-hours trading.

“The shilling traded at 84.7 per dollar after the rate cut from 84.25 before the Monetary Policy Committee’s decision,” the new agency flagged off on its website.

The Central Bank’s decision to tighten the monetary policy has eased inflation from 19.72 per cent in November last year to 10.05 per cent in June, while the shilling has stabilised at levels of Sh84 to the dollar.

But, on the backdrop of unaffordable credit, the economy slowed down to 3.5 per cent in the first quarter of this year, the lowest in four years, compared with 5.1 per cent recorded in the same period last year.

As a sign of confidence, the committee decided to revert to meeting once in two months.