As Kenya is set to begin an economic recovery after the Central Bank reduced the base lending rate to 16.5 percent after keeping it at 18 percent for seven months, the local economy could also be setting itself up for another round of rising inflation.

Since the reduction of the CBK’s base lending rate last week, commercial banks now have the leeway to cut back on their loan interest rates thereby making borrowing more attractive to the public. Already, Barclays Bank, Bank of Baroda and now CFC Stanbic Bank have cut their loan interest rates by 1.5 percent each.

With more affordable interest on loans, the public should start borrowing again thereby reversing the declined commercial bank borrowing that followed after the CBK began increased the base lending in October last year. According to Samora Kariuki, Research Analyst at NIC Capital Securities, “Low interest rates in the current environment would correspond to a weaker currency which would lead to more expensive imports and thus inflation.”

More money than there are goods and services available to buy in an economy leads to an imbalance that is the root of inflation. ‘If there is more money than there are goods and services to buy, then the prices for the goods and services will go up. If there is less money than there are goods and services to buy, then the prices for the goods and services will go down. The measurement of the change in prices over time is inflation.’ as explained in Plonkee money, a personal finance website.

During the month of September last year, inflation reached 17.32 percent, just below the year’s highest of 19.7 recorded in October. During that period, the local economy recorded the highest combined growth rates of private-sector debt, credit to finance imports, credit to finance consumer durables and credit to private households leading the Central Bank of Kenya to intervene through the Monetary Policy Committee’s upward base lending rate adjustment (MPC).

Soon after the CBK’s intervention in making commercial bank loans more expensive by increasing the base lending rate to 11 percent, 16.5 percent and finally 18 percent in October November and December of last year respectively, the growth of private sector credit, private household credit and consumer credit all slowed down (MPC).

With the CBK lending rate on the downward trend to 16.5 percent from 18 percent and projected to decline further over the coming months, Kenya could soon find herself closer to inflation if bank credit grows similar to what it did late last year when inflation was at its highest in months.