The Central Bank of Kenya continued with its policy of monetary loosening in July 2010 by cutting the central bank rate by 75 basis points to 6%-the sixth cut in 12 months-in a bid to promote economic activity and reduce borrowing costs. The reduction came in response to the overhaul of the consumer price index (CPI) by the Kenya National Bureau of Statistics (KNBS)-including the introduction of new weightings and a new basket in February 2010-which showed that prices have not been rising as quickly as feared and that inflation is currently subdued. Lower inflation has also facilitated a decline in other key interest rates: the benchmark 91-day Treasury-bill rate slipped below 2% in July-its lowest level for several years-although this proved to be a low point in the cycle and it has since edged back above 2%. Commercial banks' lending rates have been slower to respond because of the high-cost environment and relatively weak transmission mechanisms for monetary signals, but they dipped to 14% in September and will continue to ease. We forecast that lending rates will continue to subside gently throughout the forecast period (retreating to 10.5% by 2015) as the lower-inflation environment becomes established and monetary policy becomes more sophisticated, provided that the government keeps domestic borrowing under control.