Reprieve for Kenyan banks as CBK lowers rate to 11.25%

Kenyan banks have been granted a reprieve as the Central Bank of Kenya (CBK) has decided to lower rates by 75 basis points to 11.25 per cent. This significant rate cut, which marks the second-largest since the onset of the COVID-19 pandemic, comes after banks had been pushing for a reduction in lending rates. To delve into the implications of this move on Kenya's banking sector, James Muraguri, CEO of the Institute of Public Finance (IPF), shared his insights during a recent interview with CNBC Africa. The primary economic factors leading to the banks' call for a rate cut included a decline in inflation, a slowdown in the economy, and a deceleration of private sector credit growth. These factors have necessitated the need for increased liquidity, making a lower rate essential to enable banks to provide more loans to the market. Governor of the Central Bank has also encouraged banks to reduce their lending rates to stimulate credit flow to the private sector and boost economic activity. A lower Central Bank Rate (CBR) has a direct impact on commercial banks' lending behavior, prompting them to adjust their rates accordingly. With the overnight lending rate by the Central Bank being favorable, commercial banks are expected to lower their rates in response. This move is also likely to increase borrowing capacity for SMEs and households, as lower interest rates create opportunities for banks to extend more credit for consumption. The Central Bank's engagement with commercial banks in recent months has underscored the importance of reducing rates to enhance market dynamics. While the rate cut is expected to inject more liquidity into the economy, there are potential risks such as inflationary pressures and impacts on the stability of the Kenyan shilling. The increase in liquidity could lead to inflation if not managed carefully. However, the stability of the Kenyan shilling has been maintained around an average of 129, providing certainty for imports. To mitigate these risks, the CBK must strike a balance between stimulating economic growth and ensuring price stability. Looking at broader regional and global trends in monetary policy, there are valuable lessons for Kenya to draw from other economies facing similar challenges. Structural reforms aimed at enhancing productivity are essential, along with a proactive approach to policy reforms. Additionally, the central bank can play a pivotal role in driving discussions on policy reforms, particularly in areas such as food inflation, to cushion the country against rising prices. As Kenya navigates the evolving economic landscape, strategic policy measures will be crucial in fostering sustainable growth and stability.