In a strategic move to bolster economic growth, the Central Bank of Kenya (CBK) has reduced its benchmark interest rate by 50 basis points, bringing it down to 10.75%. This decision, announced on February 5, 2025, marks the fourth consecutive rate cut by the CBK, underscoring its commitment to stimulating lending and revitalizing the nation’s economy.
The Monetary Policy Committee (MPC) also lowered the Cash Reserve Ratio by 100 basis points to 3.25%. This adjustment aims to increase liquidity in the banking sector, enabling financial institutions to extend more credit to businesses and individuals. The CBK has initiated on-site inspections to ensure that banks pass on the benefits of reduced funding costs to their customers.
The CBK’s decision comes in response to a deceleration in economic growth observed in 2024. The bank noted that there is room for further easing of monetary policy to support economic activity while maintaining exchange rate stability. Inflation is expected to remain within the target range of 2.5% to 7.5% in the near term, providing a conducive environment for such policy measures.
In its latest economic outlook, the CBK forecasts a growth rate of 5.4% for 2025, an improvement from the estimated 4.6% in 2024 but slightly below the 5.6% growth recorded in 2023. The anticipated growth is attributed to the resilience of key service sectors, a recovery in agricultural performance, increased credit to the private sector, and improved export performance.
The current account deficit is projected to widen marginally to 3.8% of GDP in 2025, up from 3.7% in 2024. Despite this slight increase, the deficit remains manageable, especially considering that in 2023, it stood at 4.0% of GDP. The CBK attributes this stability to robust remittance inflows and sustained foreign exchange reserves, which currently stand at approximately $9 billion, covering more than four months of imports.
The CBK’s monetary easing has prompted responses from major commercial banks. Co-operative Bank of Kenya was the first to announce a reduction in its base lending rate, lowering it by two percentage points to 14.5%. Following suit, KCB Bank Kenya reduced its base rate by one percentage point to 14.6%. These adjustments are expected to make credit more affordable and stimulate borrowing across various sectors.
Despite the CBK’s efforts, there is concern that commercial banks may not fully transmit the benefits of lower rates to borrowers. The CBK has urged banks to adjust their lending rates accordingly and has indicated that it will monitor compliance through inspections. Failure to align lending rates with the new policy stance could attract regulatory scrutiny.
The CBK’s proactive stance is further supported by favorable inflation dynamics. As of November 2024, inflation was recorded at 2.8%, well within the government’s preferred range. This stability is attributed to low fuel and food prices, as well as a stable exchange rate, providing the CBK with the flexibility to implement growth-supportive policies without stoking inflationary pressures.
Looking ahead, the CBK maintains a positive outlook for the Kenyan economy. It projects growth rates of 5.1% and 5.5% for the next two years, respectively. These forecasts are underpinned by expectations of sustained resilience in key sectors, continued recovery in credit growth, and stable macroeconomic conditions.
CBK’s recent policy measures reflect a deliberate effort to stimulate economic activity through enhanced credit access. By lowering the benchmark interest rate and the Cash Reserve Ratio, the CBK aims to provide banks with the capacity to extend more affordable loans, thereby supporting businesses and consumers alike. The onus now lies on commercial banks to align their lending practices with the CBK’s policy direction to ensure that the intended benefits are realized across the economy.
