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CBK Slashes Lending Rate to 11.25%, Urges Banks to Follow Suit

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In a decisive move to stimulate economic recovery, the Central Bank of Kenya (CBK) has lowered its benchmark lending rate by 75 basis points to 11.25 percent. This marks the third rate cut this year, signaling the bank’s firm commitment to easing credit access for businesses and individuals alike.

During CBK’s final Monetary Policy Committee (MPC) meeting of the year, Governor Dr. Kamau Thugge called on commercial banks to adjust their lending rates in line with the new policy. His appeal was underscored by frustration over the banking sector’s reluctance to pass on the benefits of earlier rate reductions to borrowers.

“Banks have been sluggish in lowering their interest rates,” Dr. Thugge remarked. “Over the last two weeks, I’ve held meetings with all the CEOs of banks, and I believe they now understand the urgency of aggressively reducing lending rates for consumers.”

This plea comes against a backdrop of favorable economic conditions, including stabilizing inflation, a steady Kenyan shilling, and a slowing economy that has left credit growth to the private sector stagnant.

Banks Under Pressure to Act

Commercial banks, however, have previously resisted cutting lending rates, citing increased costs of deposits as a barrier. But Governor Thugge dismissed these concerns, pointing to a significant shift in the financial landscape.

“The 91-day Treasury bill, which was at around 16 percent not long ago, is now down to 10.45 percent,” he noted. “This means the cost of funding for banks is decreasing. As deposits mature, banks can now pass on these savings to borrowers by reducing their lending rates.”

Dr. Thugge stressed that cheaper credit would channel more funding to the private sector, shifting focus away from government borrowing. This, he argued, is critical for reviving economic activity, fostering job creation, and ultimately driving growth.

A Critical Juncture for Kenya’s Economy

The MPC’s decision to cut rates comes at a critical time for Kenya’s economy, which has faced mounting pressures over the past year. While inflation has shown signs of cooling, economic activity remains subdued, making access to affordable credit vital for businesses and households.

As the CBK pushes for a more responsive banking sector, the February 2024 MPC meeting will serve as a litmus test for whether commercial banks heed the regulator’s call and align their lending rates with monetary policy.

For now, all eyes are on Kenya’s financial institutions to see if they will rise to the occasion and deliver much-needed relief to borrowers.