The Central Bank's Monetary Policy Committee has announced a reduction in the base lending rate (Central Bank Rate) by 350 points to 13% down from 16.5%, a rate set in July. This is a welcome move for borrowers as banks are expected to lower interest rates they charge on loans. Commercial banks peg their lending rates on the CBR.

In July, MPC lowered the base lending rate by 150 points to 16.5% down from 18%. The MPC said all economic indicators pointed towards a stabilizing economy hence the move to lower the lending rate. The overall inflation declined from 10.05% in June 2012 to 7.74% in July 2012 and further to 6.09% in August 2012. The committee says the decline in the overall inflation was supported by a continued reduction in food and fuel prices as well as easing demand pressures in the economy.

Interest Rates

Commercial banks will be expected to follow the MPCs move to lower their rates to transfer the benefit to borrowers. Pressure will mount on commercial banks some of which have not lowered their rates since the MPC lowered the rates in June.

"The Committee noted that interest rate spreads remained high suggesting that these cost reductions had yet to be fully transferred to bank customers and the economy at large through declining cost of credit." Read a statement released by the committee.

According to a quarterly report released by the Ministry of Finance in August, the average lending rate stood at 20.4% in June 2012, while the average deposit rate was about 7.9%. As a result, the spread between the average lending and deposit rates increased to 12.5% in June 2012 from about 10% in June 2011. The lower MPC rate should allow banks to reduce  this gaps by the end of the year.

Read here for what Monetary Policy is, and why you should care.