The Kenya Bankers Association (KBA), in what might be seen as a surprising move, has called for a further reduction in interest rates ahead of the Central Bank of Kenya's Monetary Policy Committee meeting.
KBA, which initially had reservations about interest rate cuts by commercial banks, revealed in research published on Wednesday that lowering the Central Bank Rates(CBR) further would encourage more borrowing in the country.
Additionally, KBA argued that such a move would help support economic growth, which has been stifled by various internal and external factors.
The announcement comes less than a week before the CBK's Monetary Policy Committee meeting, scheduled for next Wednesday.
According to KBA, the decision was based on key observations indicating stability in inflation indices, which remain within the CBK’s target range.
They attributed this stability mainly to government interventions and external factors that have helped keep food and fuel prices low.
KBA argued that the proposal to further cut interest rates was driven by weak demand for goods and services across the economy.
"In view of these developments, and the growing need to reverse the deceleration in private sector credit, we call for a further cut in the Central Bank Rate (CBR) to provide additional impetus to the ongoing downward adjustments in commercial banks’ lending rates," read part of the KBA publication.
However, the association also acknowledged that banks are grappling with a high volume of unpaid loans, making it difficult to lower interest rates and increase lending.
CBK in its report on Thursday, December 5, lowered the base lending rate by 75 basis points from 12 per cent to 11.25 per cent, pointing to lower interest rates by commercial banks.
Central Bank Governor Kamau Thugge attributed the decision to cut the base lending rates to stable inflation which by then was at 2.8 per cent.
However commercial banks by then seemed to have had divergent opinions on the interest rate cuts with some of them appearing to protest the decision.
“Banks have been sluggish in lowering their lending rates. Two weeks ago I had a meeting with bankers, and I do believe they now understand the reason why they need to start lowering their rates progressively," Kamau said at the time.
What it means
The immediate impact of lower interest rates is that borrowers can access more affordable loans to finance their projects due to reduced borrowing costs. This is especially reflective if banks access lower CBRs.
The lowering of interest rates means that consumers have more disposable income which boosts their demand for goods and services, stimulating economic growth.
Economic Outlook
Kenya's economy grew by 4.0% in the third quarter of 2024, with slow credit growth and global uncertainties contributing to the slowdown.
This performance suggested that key sectors were facing challenges, including limited access to credit and external economic pressures.
The outlook indicated the need for policy interventions to stimulate economic activity, such as easing credit conditions, cutting interest rates, or boosting domestic demand.
