The cost of loans is set to reduce for the first time since early June 2015 after policymakers at the central bank cut the benchmark lending rate by 50 basis points to 9.5 percent.
This means that banks will going forward be required to charge a maximum of 13.5 percent interest on loans.
Central bank Governor Dr. Patrick Njoroge who chairs the Monetary Policy Committee says the latest decision is anchored on the need to support economic activity.
It is a relief for borrowers after the Central Bank’s Monetary Policy Committee has lowered the benchmark lending rate to 9.5 percent from 10 percent the first time it has done so since the coming into force of the interest rate capping law.
This is the lowest central bank rate since early June 2015 when the rate was at 8.5 percent.
The decision to reduce the central bank rate comes despite the continued rationing of credit by banks in a somewhat protest against the cap on interest rates that has seen a dwindling in private sector credit growth to the current 2.1% from 2.4% in December last year, below the government set annual target of 18.3%.
In a statement, Central Bank Governor Dr. Patrick Njoroge who chairs the Monetary Policy Committee noted that the lowering of the key lending rate has among others been occasioned by the need to ease the monetary policy stance in order to support economic output which is currently below its potential level.
While noting the risk of perverse outcomes, the MPC further noted that inflation expectations were well anchored within the Government target range, in addition to increased optimism for growth prospects in the economy.
The lowering of the central bank rate comes against the expectations of many analysts such as Cytonn Investments who had projected that the central bank would hold the benchmark rate at the 10 percent level.
The recently extended precautionary arrangement from the IMF has seen forex reserves at the central bank increase to 8.83 billion dollars which is equivalent to 5.9 months of import cover, up from 7.08 billion dollars equivalent to 4.7 months of import cover.