The Central Bank of Kenya continued with its policy of monetary loosening in January 2011 by cutting the central bank rate (CBR) by 25 basis points to 5.75%-the seventh cut in 24 months-in a bid to promote economic activity and reduce borrowing costs. However, whereas the cuts in 2010 took place in an environment of falling inflation-helped by the introduction of a new, re-weighted consumer price index in February 2010-inflation is now rising again, which means that the next CBR movement is likely to be upwards. Apart from the CBR, other key interest rates are moving higher in response to strong credit demand (especially from the government) and higher inflation. The 91-day Treasury-bill rate (the main benchmark) climbed to 2.5% in January, a seven-month high, while other bill and bond rates are following a similar trend. The downward drift in commercial banks' lending rates (by 40 basis points to 14.4% in 2010) has also stalled. We still expect lending rates to subside gently during the forecast period (to 11% by 2015) as monetary policy becomes more sophisticated and banks trim their costs, although rates will rise if the government fails to keep domestic borrowing under control or if higher inflation becomes entrenched.