Kenya’s central bank stunned the market Tuesday by cutting its benchmark lending rate by 50 basis points to 10 per cent, giving further relief to borrowers whose loans would now be re-priced downwards.

A cross-section of analysts had expected the rate to remain unchanged at 10.5 per cent amid confusion in the banking industry over the newly introduced law capping interest rates, which came into force on September 14.

READ: Kenya's consumer lobby to sue banks not enforcing rates law

The Central Bank’s Monetary Policy Committee (MPC) noted that the continued decline in private sector credit growth for the last two months poses a risk to economy.

In a statement Tuesday, the committee said that while loans to the private sector has been declining, the distribution of liquidity in the banking system has improved with the lenders’ average liquidity increasing to 41.9 per cent in August from 41.6 per cent in June.

“The CBK is closely monitoring the impact of the new law on monetary policy and the overall economy and will continue to put in place measures to sustainably reduce the cost of credit and improve liquidity management,” said Dr Patrick Njoroge, the Central Bank of Kenya governor and the chairman of the MPC.

The Banking (Amendment) Act 2016 caps lending rates at not more than four percentage points above the Central Bank Rate and deposit rates must at least be 70 per cent of the Central Bank’s benchmark rate.

Some commercial banks have been re-pricing outstanding and new loans to 14.5 per cent in compliance with the law but will now have to reduce their pricing further to 14 per cent after the MPC decision.