CBK slashes key rate to 8.75 to fuel lending

Kenya’s Central Bank (CBK) has reduced its benchmark lending rate to 8.75 percent, in order to stimulate private-sector credit and bolster economic expansion.

The Monetary Policy Committee (MPC) said the decision was driven by easing inflationary pressures, a relatively stable exchange rate and signs that the economy is poised for faster growth if financing conditions improve. The rate cut lowers the Central Bank Rate (CBR) from its previous level, signaling a clear shift toward a more accommodative monetary stance.

Inflation has remained within the government’s target range, hovering near a multi-year low, supported by stable food prices and lower global fuel costs. The shilling, which faced bouts of volatility in recent years, has steadied against major currencies, easing pressure on import costs and public debt servicing.

CBK said the move aims to make credit more affordable for businesses and households, particularly small and medium-sized enterprises that have struggled with high borrowing costs.

Central Bank Governor Kamau Thugge said the effectiveness of the latest cut will largely depend on how quickly commercial banks pass on lower rates to borrowers.

“We expect banks to reflect the reduced policy rate in their lending rates to support productive sectors of the economy,” the Governor said during a post-MPC briefing. “The objective is to unlock private-sector credit and sustain the recovery momentum.”

Private-sector credit growth has been subdued in recent months, despite earlier policy easing. Analysts say risk aversion among lenders and cautious borrowing by businesses have slowed transmission of monetary policy changes.

The Governor emphasized that the banking system has adequate liquidity and capital buffers, noting that there are no structural constraints preventing banks from expanding credit. The CBK indicated it will closely monitor lending trends to ensure that policy adjustments achieve their intended impact.

Market analysts view the rate cut as a calculated gamble, with the central bank balancing support for growth against the risk of reigniting inflation or triggering currency volatility. However, with inflation expectations anchored and external pressures relatively contained, policymakers appear confident in their room to maneuver.

Kenya’s economy expanded by 4.9 percent in the most recent full-year reading, driven by resilience in agriculture, transport, financial services and tourism. However, growth has remained below the levels needed to generate sufficient jobs and lift household incomes significantly.

The CBK projects that economic activity will strengthen in the coming quarters, supported by improved agricultural output, a rebound in private investment and sustained infrastructure development.

Cheaper credit is expected to play a key role in this outlook. Lower borrowing costs could spur expansion in manufacturing, construction and trade, sectors that are sensitive to interest rate movements.

Economists note that easing monetary policy also complements fiscal consolidation efforts by reducing government borrowing costs and potentially easing pressure on domestic debt markets.

Still, some caution that global uncertainties—including commodity price swings and shifts in international financial conditions—remain potential headwinds.

The central bank reiterated that Kenya’s banking sector remains stable and well-capitalized, with liquidity ratios above statutory requirements. Non-performing loans (NPLs), which had risen amid economic strain, have begun to decline, reflecting improved repayment capacity and loan restructuring efforts.

“The resilience of the banking sector provides confidence that credit growth can safely pick up without compromising financial stability,” the Governor said.

Lower NPL ratios could encourage banks to extend more credit, particularly to sectors that had previously been considered high risk. Analysts expect competition among lenders to intensify as institutions seek to expand their loan books in a lower-rate environment.

Financial markets reacted calmly to the announcement, with bond yields showing modest movement and the shilling holding steady.

The CBK signaled that future policy decisions will remain data-driven, with close attention to inflation trends, exchange rate stability and global economic developments.

For businesses and households, the immediate focus will be on whether the latest rate cut translates into tangible reductions in lending rates—and whether cheaper credit can indeed reignite investment and accelerate Kenya’s growth trajectory.