Recently Standard Chartered Bank reviewed its interest rate on unsecured loans down from 23% to 19.9%. Last week, Barclays Bank followed suit and lowered the interest rates on some of its financial products.

According to the Daily Nation, Housing Finance managing director Frank Ireri is optimistic that the second quarter of the year could give borrowers a respite on loans. He says inflation is likely to continue its downward trend, signalling an overall reduction in interest rates and a resumption in uptake of mortgage and other loans.

“Rates could start falling beginning the second quarter of this year if inflation continues to decline to single-digit levels,” Mr Ireri said. Analysts say the time is ripe for the rates to start falling.

What does this mean for you and me?

Ideally high interest rates mean that the banks expect the real value of money to go down during the duration of the loan. As a result they charge a higher interest rate to compensate themselves for this loss in value. This loss in the real value of money is called inflation.

Inflation and You

Looking at inflation from a “real value of money” perspective may be confusing. Inflation can be viewed as a gradual increase in the price of goods. Supposing a 2 kg pack of maize meal cost 100 shillings in January and it now costs 120 shillings. This 20 shilling increase in price is a result of increased inflation. It is clear that inflation affects every consumer therefore a reduction in interest rates should have an effect on the average consumer.

The expectation that banks will be reducing the interest rates on their financial products means that they expect inflation to go down in the near future.

Currently, the inflation rate stands at 16.69% down from 18.31% in January. Should inflation continue with this falling trend, Kenyans should expect a relief from the high price of commodities they are currently subjected to. Let’s all hope that this expectation is accurate.