CBK lowers key rate to spur credit uptake as banks freeze loans

CBK Governor Kamau Thugge. [File, Standard]

The Central Bank of Kenya (CBK) has lowered its key interest rate to 12.75 per cent from 13 per cent in a bid to spur credit uptake, as banks have been freezing loans amid a deteriorating economic environment.

The Monetary Policy Committee (MPC) of the CBK, which was chaired by Governor Kamau Thugge, noted that its previous policy measures had lowered overall inflation in Kenya to 4.3 per cent in July 2024, below the mid-point of the target range. 

Non-food non-fuel inflation also eased to 3.3 per cent, reflecting the impact of monetary policy actions, Thugge said.

“The Committee further noted that non-food non-fuel inflation has moderated, while central banks in some major economies have lowered interest rates in response to easing inflationary pressures, with indications that other central banks will soon embark on a similar trajectory,” the CBK said in a statement.

The MPC concluded that there was scope for a gradual easing of the monetary policy stance while ensuring continued exchange rate stability. The CBK’s foreign exchange reserves stand at $7,303 million (964 billion) or 3.78 months of import cover, providing adequate cover and a buffer against short-term shocks, it said. 

With borrowers unable to repay their loans the ratio of gross non-performing loans to gross loans stood at 16.3 per cent in June 2024, up from 16.1 per cent in April, said CBK.

This increase in bad loans was attributed mainly to a 1.5 per cent decrease in gross loans, compared to a lower 0.7 per cent decline in NPLs.

Growth in commercial bank lending to the private sector stood at four per cent in June 2024, down from 4.5 per cent in May, as banks shunned borrowers.

CBK however said this also partly reflected exchange rate valuation effects on foreign currency-denominated loans following the appreciation of the Kenyan shilling.

The MPC’s decision to lower the Central Bank Rate is aimed at stimulating credit growth and supporting the economy, which is projected to grow by 5.4 per cent in 2024, down from 5.6 per cent in 2023.

The outlook, however, remains subject to risks, including geopolitical tensions.