Kenya cuts base lending rate to 10.75%

The Central Bank of Kenya has made a significant move to ease the cost of borrowing by slashing the base lending rate to 10.75 per cent. This decision has been welcomed as a massive relief to the economy, with expectations that it will unlock at least 60 billion Kenyan shillings to enhance liquidity in the domestic market. As Kenya prepares to secure another round of loans from the International Monetary Fund (IMF), the monetary tightening stance adopted by the Central Bank is crucial in stabilizing the financial landscape. Kwame Owino, the Chief Executive Officer of the Institute Of Economic Affairs, Kenya, sheds light on these developments and offers insights into the implications of the rate cut. Reflecting on the recent rate cut, Kwame Owino points out that the monetary policy in Kenya has been overly tight for an extended period. He emphasizes the need for a more significant reduction in the base lending rate, suggesting that even though there was a 50 basis points cut, the pace of decline is still slow. With inflation currently hovering at a remarkably low level of two percent, well below the target range of five to seven and a half percent, Owino argues that the sluggish demand and tepid growth demand a more substantial adjustment in monetary policy. Owino further speculates on the potential for additional rate cuts in the upcoming meetings, highlighting the importance of closely monitoring economic conditions and adapting the policy framework accordingly. He stresses the importance of private sector lending in stimulating economic activity and job creation, pointing out that unless banks respond more proactively to the reduced base lending rate, the expected benefits may not materialize as desired. One of the key points raised by Owino is the complexity of the transmission mechanisms from the Central Bank's policy decisions to the actual lending rates in the market. Despite the Central Bank's efforts to spur lending by reducing the Cash Reserve Ratio (CRR) by 3.5 percent, banks have been cautious in extending credit to businesses at lower rates. Owino questions the reluctance of banks to leverage the surplus liquidity to support private sector growth, attributing it to the prevailing high interest rates and government borrowing costs. He argues that the Central Bank's scrutiny of banks' lending practices should be complemented by a review of the broader fiscal policies affecting the lending environment. Looking ahead, Owino casts doubt on the projected economic growth of 5.4 percent in 2025, stemming from the rate cut and CRR adjustment. He underscores the need for a comprehensive assessment of the existing challenges in the financial sector, urging a more holistic approach to address the underlying issues impeding the effective transmission of monetary policy. While the Central Bank anticipates a significant boost in lending following the rate cut, Owino remains cautious, emphasizing the need for a more nuanced strategy to revitalize lending to the private sector. In conclusion, Kwame Owino's analysis underscores the complexity of the current monetary policy landscape in Kenya. As stakeholders await further developments in the economy, the efficacy of the recent rate cut in stimulating lending and fostering economic growth remains a subject of intense scrutiny. The Central Bank's role in navigating this challenging terrain and fostering a conducive environment for sustainable economic expansion will be pivotal in shaping Kenya's financial future.