CBR Down to 16.5% – So What?

Central Bank of Kenya (CBK) lowered the Central Bank Rate (CBR) rate to 16.5% after maintaining it at 18% for several months in a monetary stance meant to curb inflation and exchange rate volatility. That the monetary stance worked is not in question, since; the inflation has come down to the lows of 10.05% from highs of about 19% and exchange rate has stabilized at around ksh.84 to the dollar from the lows of about ksh.107 to the dollar.
Of major concern though is what this reduction in CBR means to the Kenyan at the grass root; who do not even know what it is in the first place, but who is indirectly and to a great extent affected by this rate.
Probably it would be a good idea to first explain what it is: CBR is the rate at which the Central Bank of Kenya lends money to commercial banks. The commercial banks then use the borrowed money plus their customers’ deposits to lend to us the public; they lend at an interest rate that secures them a good profit by the end of the transaction.


It therefore follows that, the CBR then has a bearing in the interest rate you will be charged at your local commercial bank when you go to borrowing money. The higher the CBR, the higher the interest rates the commercial banks will charge you on any loan you would like to take; and the reverse is also true. It happens this way since the commercial banks are profit seeking institutions, and they have to lend you at a higher rate than the rate they borrowed with in order to make those profits.
With that background, I believe you can now see why it is important for you that the CBR has been lowered. Going by what has started happening in the market; whereby commercial banks are now also lowering their lending rates, – Barclays bank lowered their lending rate to 21% from 22.5% a short while after CBK released the lowered CBR – credit will then be available to many people since they will be able to afford the rates.
With more money available in the hands of business people, there will be more investments in the economy. On the other hand more money in the hands of you and me the general public means we are going to spend more. This will then push up consumption of the products from the expanded operations of the businesses; which also had access to the cheaper credit with which they increased production.
The ultimate effect of this reduction could then be a much vibrant economy with a rising GDP. At least that is what the economists at the Central Bank of Kenya are hoping for.
However, things could also turn sour and we happen to get a reversal of the declining inflation rates. How?
This is how. The increased money supply in the economy as a result of too much borrowing of the relatively “cheap” credit could bring about a situation of too much money chasing too few goods. Consumption could be driven up by the increased purchasing power of the consumers from the borrowed money, and hence create an artificial shortage of goods, thus driving their prices up. And what do we call the general upward movement of commodity prices? You’ve got it right, its inflation.
This unfavorable outcome could also be compounded by the fact that this is an electioneering year. This means too much “free” campaign money is being pumped into the economy, thus bloating the money supply in the economy even further. In addition, the government will also be spending a lot of money in the election process thus adding more money into the economy. The net effect of all these factors if they come to play can only be anyone’s guess.
All said and done, the CBR now stands at a lower rate of 16.5% and we have policy makers to monitor our economy and control it`s reaction to all market forces. We hope that this time round they play the balancing game with lots of wits; to avoid dumping this economy into some recession of a kind just after the elections.

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2 thoughts on “CBR Down to 16.5% – So What?

  1. Question; Banks are supposed to borrow from the Central Bank as a last Result hence the CBR should not be used as an entire bearing to determine interest rate… Banks can either borrow from each other or outside i.e. IFC etc

  2. You are right Bernard, the commercial banks have other options from where they can borrow….interbank borrowing is relatively cheaper compared to CBR both going at 13.2336% and 16.5% respectively as at now, however funds from interbank borrowing are limited as each bank needs more money to lend…

    borrowing from the international financial institutions like the IFC is also a prudent idea,…but be ware of the stringent conditions usually tied to their lending…

    In essence, CBK being their lender of last resort, commercial banks in Kenya always have to take the CBR as their benchmark lending rate….

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