Nairobi — Borrowers are likely to breath a sigh of relief after the Central Bank's Monetary Policy Committee (MPC) lowered the benchmark rate from 18 to 16.5 percent, citing a drop in inflation and a successful policy stance.
Focus will now shift to commercial banks to see whether they will lower their lending rates.
The Central Bank Rate (CBR) has remained at 18 percent for the last six months.
At a meeting on Thursday, the MPC observed that the overall month-on-month inflation declined from 12.22 percent in May to 10.05 percent in June mainly arising from a reduction in food and fuel prices.
"Inflation has continued to decline while the exchange rate remains stable. This follows the recent turbulence in the global foreign exchange markets which was mainly attributed to instability in the Eurozone and the effects of oil prices," read a statement from the CBK. "The non-food-non-fuel inflation declined from 10.27 percent in May 2012 to 9.31 percent in June 2012."
The committee added that the future outlook remains positive following fiscal measures announced by the Government during the Budget Statement for the fiscal year 2012/13 which are consistent with monetary policy objectives. The borrowing plan will ensure that domestic debt remains within the thresholds set in the Medium Term Debt Management Strategy.
The Committee however noted that there are still potential threats and risks to both consumer prices and exchange rate stability that could increase inflationary pressure.
The average exchange rate fluctuated within a narrower range of between Sh84.79 and Sh86.12 against the US Dollar in June, compared with a range of between Sh83.27 and Sh86.83 in May.
"The current account deficit which eased slightly from an estimated 11.4 percent of Growth Domestic Product (GDP) in April 2012 to 11.3 percent in May 2012 remains high and continues to pose a threat to exchange rate stability as well as the pass-through effects to domestic prices," added the statement.
In addition, the committee said there has also been a substantial deterioration in global financial conditions and slowdown in economic activity in emerging-market economies. These developments continue to pose a risk to the demand for Kenya's exports as well as foreign earnings from tourism, their receipts have traditionally supported the exchange rate.