CBK Slashes Benchmark Rate to 9.75%, Adjusts 2025 GDP Growth to 5.2% Amidst Shifting Economic Tides

In a significant move signaling a renewed commitment to economic stimulus, the Central Bank of Kenya’s (CBK) Monetary Policy Committee (MPC) has announced a reduction in its benchmark interest rate by 25 basis points, bringing it down to 9.75%. This decision marks a pivotal moment, returning the rate to single digits for the first time since May 2023 and firmly entrenching the CBK’s monetary easing cycle, designed to boost lending and invigorate the nation’s economy amidst a period of easing inflationary pressures.

The current rate cut is the latest in a series of proactive adjustments by the CBK. Since August 2024, the institution has delivered six consecutive rate reductions, collectively bringing the benchmark rate down from a peak of 13.00% to its current 9.75%. This sustained easing reflects the MPC’s growing confidence that inflationary pressures have sufficiently subsided, creating room for a more supportive monetary policy stance.

However, the MPC also revised Kenya’s expected Gross Domestic Product (GDP) growth rate for 2025 downward, from an earlier projection of 5.4% to 5.2%. This slight but notable adjustment is primarily attributed to anticipated higher tariffs on trade, which are expected to have ripple effects across key sectors of the economy. Despite this moderation, the MPC remains optimistic, highlighting the “resilience of key service sectors and agriculture, expected recovery in growth of credit to the private sector, and improved exports” as crucial pillars supporting economic pickup in 2025.

Understanding the Central Bank of Kenya’s Mandate: Guardians of Economic Stability

At the heart of Kenya’s economic management lies the Central Bank of Kenya, an institution whose role is clearly defined in Section 231 of Kenya’s Constitution and the CBK Act. The CBK’s principal objective is to formulate and implement monetary policy aimed at achieving and maintaining stability in the general level of prices. In simpler terms, its primary goal is to ensure that the value of the Kenyan Shilling remains stable, meaning your money can buy roughly the same amount of goods and services today as it can tomorrow. This “price stability,” measured by a low and stable inflation rate, is considered crucial for fostering long-term planning, encouraging investment, and ultimately, driving sustainable economic growth.

The CBK achieves these objectives through its Monetary Policy Committee (MPC), a powerful body that convenes regularly – at least every two months – to assess economic conditions and make critical decisions regarding the Central Bank Rate (CBR). The CBR is the benchmark interest rate that influences all other interest rates in the economy, from what commercial banks charge borrowers to what they offer savers. Movements in the CBR serve as a clear signal of the CBK’s monetary policy stance, indicating whether it’s tightening (raising rates to curb inflation) or easing (lowering rates to stimulate growth).

Beyond the CBR, the CBK employs several other tools to manage liquidity and influence credit conditions in the economy:

• Cash Reserve Ratio (CRR): This is the proportion of deposits that commercial banks are required to hold with the CBK. By adjusting this ratio, the CBK can significantly alter the amount of money available for lending in the market.
• Open Market Operations (OMO): These involve the CBK’s buying and selling of eligible government securities in the open market. When the CBK buys securities, it injects liquidity into the banking system, making it easier for commercial banks to expand loans and increase the money supply. Conversely, selling securities withdraws liquidity. OMOs are also used to stabilize short-term interest rates.
• Discount Window Operations: This is a facility through which commercial banks can borrow from the CBK, typically at a higher rate than the CBR, serving as a last resort for liquidity.

These tools allow the CBK to control the overall money supply in the economy, ensuring it aligns with the government’s economic growth and price stability targets.

The Rationale Behind the Rate Cut: Taming the Inflation Dragon

The decision to cut the benchmark rate reflects the MPC’s confidence that Kenya has successfully managed to tame its inflationary pressures. This is a significant achievement, as high and volatile inflation can severely erode purchasing power, destabilize businesses, and deter investment. Kenya’s inflation targeting framework, closely monitored by the Kenya National Bureau of Statistics (KNBS) and the CBK, distinguishes between different types of inflation to gain a comprehensive understanding of price dynamics.

• Headline Inflation: This is the most commonly cited measure, representing the overall change in the cost of a basket of goods and services.
• Core Inflation: This is a more stable measure that excludes the highly volatile prices of certain commodities, particularly food and energy. These items are often subject to sudden price swings due to factors outside the CBK’s direct control, such as weather patterns or global commodity shocks. Core inflation, therefore, provides a clearer picture of underlying inflationary trends driven by broader economic demand.
• Non-Core Inflation: This component specifically refers to the volatile elements, primarily food and energy prices, whose fluctuations can significantly impact headline inflation but may not reflect sustained economic pressures.

Kenya’s overall inflation dropped to 3.8% in May 2025, a commendable decrease from 4.1% in April. Crucially, this figure remains comfortably below the CBK’s 5% ± 2.5% target range, indicating that the central bank is successfully anchoring inflationary expectations. Non-core inflation declined to 6.0% due to lower food and energy prices, which is a positive development for most households. The easing of food prices is often attributed to improved agricultural output stemming from favorable weather conditions, while energy prices reflect global trends in oil and gas markets.

However, the MPC noted that core inflation edged up slightly to 2.8%, mainly due to higher processed food prices. While this warrants continued monitoring, the overall trend suggests that the underlying inflationary pressures are subdued.

Humanizing the Impact of Inflation: A Daily Struggle

For the average Kenyan household and business, the easing of inflation is more than just a statistical figure; it translates directly into tangible relief. High inflation, in simpler terms, means that your money buys less over time. This erosion of purchasing power hits ordinary families hard, especially low-income households that spend a disproportionately large share of their income on essential items like food and transportation. When food prices spike, as they frequently have in Kenya due to climate-related disruptions and supply chain issues, families are forced to make difficult choices, often reducing meal portions or skipping meals altogether.

For businesses, rampant inflation presents a different set of challenges. Higher production costs, driven by rising input prices (including fuel and raw materials), squeeze profit margins. Businesses then face the difficult dilemma of either absorbing these costs, which impacts their viability, or passing them on to consumers through higher prices, which can dampen demand. Furthermore, in an inflationary environment, borrowing costs tend to be steeper as the Central Bank raises interest rates to curb price increases. This makes it more expensive for businesses to access credit for expansion, investment, or even to cover operational shortfalls, stifling job creation and economic growth. The CBK’s current easing cycle aims to alleviate these pressures, making it more affordable for businesses to borrow and invest, thereby stimulating job creation and boosting consumer spending.

The Journey to Single Digits: A Monetary Policy Cycle

The CBK’s recent rate cut to 9.75% is the culmination of a deliberate monetary easing cycle that began in August 2024. This marks a significant shift from periods of aggressive tightening, such as before May 2023, when the CBK had consistently raised interest rates to combat persistent inflationary pressures, stabilize the exchange rate, and manage external shocks. For instance, the CBR stood at 13.00% as recently as April 2024, reflecting a hawkish stance to anchor inflation.

The six consecutive rate cuts since August 2024 signal a clear pivot towards a more accommodative monetary policy. This shift is driven by the MPC’s assessment that:

• Inflationary pressures are under control and expected to remain within the target range.
• There is scope to stimulate private sector credit growth.
• Global central banks are also moving towards easing monetary policy, which influences Kenya’s policy decisions.

The Expected Impact of Lower Rates: A Shot in the Arm for the Economy

Lower interest rates typically have a cascading effect across the economy:

• Reduced Borrowing Costs: Commercial banks, in response to a lower CBR, tend to reduce their lending rates. This makes it cheaper for businesses to take out loans for investment, expansion, and working capital. For individuals, it means more affordable mortgages, car loans, and consumer credit.
• Stimulated Investment: With lower borrowing costs, businesses are more inclined to invest in new projects, machinery, and technology, leading to increased productivity and job creation.
• Increased Consumer Spending: Lower interest rates can encourage consumers to borrow and spend more, boosting demand for goods and services. It also makes saving less attractive, potentially redirecting funds towards consumption or investment.
• Recovery in Private Sector Credit Growth: The MPC specifically highlighted the “expected recovery in growth of credit to the private sector.” This is crucial because robust private sector credit growth is a strong indicator of economic dynamism and investment activity. When businesses can easily access financing, they are better positioned to expand, innovate, and create jobs.

However, the CBK is also mindful of historical lessons. Kenya has experienced periods of interest rate controls in the past, which, despite good intentions, sometimes led to unintended consequences such as a collapse of credit to micro, small, and medium enterprises (MSMEs) and a shift of bank lending towards safer government securities. The current approach, while aiming to stimulate lending, does so within a market-driven framework, allowing commercial banks to make their own lending decisions based on risk assessment. The MPC’s emphasis on “catalyzing growth in commercial bank lending to the private sector” signifies a desire to see credit flow to productive sectors of the economy.

Kenya’s Economic Outlook: Growth Trajectories and Headwinds

While the rate cut aims to stimulate growth, the MPC’s downward revision of the 2025 GDP growth forecast from 5.4% to 5.2% reflects an acknowledgment of persistent global and domestic headwinds. The primary factor cited is the “higher tariffs on trade.”

The Shadow of Tariffs: Impact on Kenyan Trade and Sectors

The global trade environment has been tumultuous, particularly due to the ongoing trade tensions between major economies like the US and China, which have resorted to slapping tariffs on a wide range of imports. While these tariffs are often aimed at specific trading partners, their ripple effects can significantly impact smaller, open economies like Kenya.

For Kenya, higher tariffs, particularly those imposed by major trading partners, can have several adverse effects:

• Erosion of Competitiveness: Kenyan products, such as textiles, coffee, tea, and horticultural goods, which historically enjoyed duty-free access to markets like the U.S. under initiatives like the African Growth and Opportunity Act (AGOA), can suddenly face higher import duties. This makes them more expensive and less competitive, leading to reduced export volumes and lost revenue for Kenyan producers.
• Increased Import Costs: Conversely, if Kenya itself imposes higher tariffs on certain imports, or if its trading partners do so, it can lead to higher costs for raw materials, intermediate goods, and finished products. This directly impacts businesses reliant on imports for their production processes, driving up their operating costs and potentially leading to higher consumer prices.
• Supply Chain Disruptions: Tariffs can disrupt established global supply chains, forcing businesses to seek alternative, potentially more expensive or less efficient, sources for their inputs. This can lead to production delays and increased logistical costs.
• Reduced Trade Volumes: Overall, higher tariffs tend to reduce the volume of international trade, which directly impacts a trade-dependent economy like Kenya’s. This slows down economic activity and can lead to job losses in export-oriented sectors.

Despite these headwinds, the MPC remains confident in Kenya’s inherent economic strengths.

Resilience of Key Sectors: Pillars of Growth

Kenya’s economy is diversified, with several key sectors acting as powerful engines of growth:

• Agriculture: Often referred to as the backbone of Kenya’s economy, agriculture contributes around 20-25% of GDP and employs over 40% of the workforce. Kenya is a leading exporter of vital agricultural products like tea, coffee, and fresh horticultural produce (flowers, fruits, vegetables). Improved rainfall and agricultural productivity are critical drivers of overall economic performance and food security.
• Services Sector: This is a dynamic and rapidly expanding segment, encompassing:
  • Tourism: A major foreign exchange earner, tourism relies on Kenya’s renowned wildlife, beaches, and cultural heritage, attracting millions of international visitors annually.
  • Information and Communication Technology (ICT): Dubbed the “Silicon Savannah,” Kenya’s ICT sector is booming, driven by high mobile penetration (over 90%) and innovations in fintech (like M-Pesa), e-commerce, health tech, and logistics. Government initiatives like Konza Technopolis are further fostering tech talent and innovation.
  • Financial Services: A sophisticated and growing financial sector, supported by mobile money platforms and increasing international investment, facilitates seamless transactions and promotes financial inclusion.
• Manufacturing: While smaller in contribution, the manufacturing sector (around 10% of GDP) is vital for job creation and value addition, particularly in agro-processing and textiles.
• Infrastructure Development: Major ongoing projects in roads, railways (like the Standard Gauge Railway), and ports (like LAPSSET Corridor) are enhancing connectivity, reducing logistics costs, and accelerating industrial growth.

The combined strength of these sectors is expected to buffer the economy against external shocks and support the anticipated pickup in growth despite the tariff challenges.

Key Economic Indicators: A Snapshot of Health

The MPC meeting highlighted several other crucial economic indicators that provide a comprehensive snapshot of Kenya’s financial health:

• Current Account Deficit (CAD): The CAD narrowed significantly to 1.8% of GDP in the 12 months to April 2025. This is a positive sign, indicating that the value of goods and services Kenya imports is becoming more balanced with the value of its exports and income from abroad. A narrowing deficit reduces pressure on the local currency and signifies a healthier external position. This improvement was largely driven by robust exports (particularly horticulture and coffee, as noted by the CBK) and resilient diaspora remittances.
• Diaspora Remittances: These are funds sent home by Kenyans living abroad, and they have become an increasingly vital and stable source of foreign exchange for the country. In 2024, Kenya’s diaspora remittances climbed by 14% to KES 674.1 billion (approximately $5.1 billion USD). The United States remains the largest source, but inflows from the UK, Canada, Australia, and the Gulf Cooperation Council (GCC) countries are also growing. These remittances not only provide crucial financial support to countless households for education, healthcare, and housing but also significantly bolster Kenya’s foreign exchange reserves, helping to stabilize the Kenyan Shilling.
• Foreign Exchange Reserves (Forex Reserves): Kenya’s foreign exchange reserves stood at a healthy USD 10.8 billion, equivalent to 4.75 months of import cover. Foreign exchange reserves are a critical buffer against external shocks, allowing the country to pay for its imports, service its foreign debt, and intervene in the currency market to manage volatility. A healthy level (typically 4 months or more of import cover) reassures investors and provides stability.
• Private Sector Credit Growth: This crucial indicator showed a welcome rise to 2.0% in May 2025, reversing earlier declines. This recovery suggests that commercial banks are becoming more willing to lend to businesses and individuals, and that demand for credit is picking up. Sustained growth in private sector credit is essential for fueling economic activity, driving investment, and creating jobs.
• Non-Performing Loans (NPLs): NPLs, which are loans where borrowers have failed to make scheduled payments for 90 days or more, slightly increased to 17.6% in April. This is a statistic that warrants careful monitoring. The rise in NPLs can be attributed to a combination of factors, including the lingering effects of the COVID-19 pandemic, past high interest rates, and financial strain on borrowers due to various economic pressures. When NPLs rise, banks may become more cautious in their lending, potentially raising interest rates or imposing stricter loan requirements, which can reduce overall credit availability, especially for small businesses. However, the MPC noted that banks remain stable with adequate provisioning, meaning they have set aside sufficient funds to cover potential losses from these bad loans, thus mitigating systemic risk to the financial sector.

Public and Market Perception: Gauging the Pulse

The CBK’s decision to cut rates was met with anticipation, reflecting a nuanced understanding of economic indicators among the public and market participants. A pre-meeting Twitter poll revealed that 41% of respondents expected the CBK to maintain the rate at 10.00%, while a significant 27% anticipated a 25–50 basis points cut—precisely matching the MPC’s actual decision to cut by 25bps to 9.75%. This alignment of public expectation with policy action indicates a degree of transparency and predictability in the CBK’s communication.

The immediate market impact of such decisions is always closely watched. While the current market environment is complex, characterized by global economic risks, the CBK’s proactive stance is generally seen as a positive signal for both investors and consumers, boosting sentiment and encouraging economic activity.

Conclusion and Future Outlook: A Balanced Approach to Prosperity

The Central Bank of Kenya’s decision to lower its benchmark rate to single digits while prudently revising its GDP growth forecast underscores its commitment to a balanced monetary policy approach. By prioritizing price stability while simultaneously striving to inject liquidity and stimulate economic activity, the CBK aims to navigate both global headwinds and domestic challenges.

The focus on private sector credit growth, the continued strength of diaspora remittances, and the resilience of key sectors like agriculture and services all point to a foundational robustness in Kenya’s economy. While the impact of higher tariffs remains a concern, the CBK’s active monitoring and readiness to take further action, as indicated by the next MPC meeting scheduled for August 2025, suggest a dynamic and responsive approach to economic management.

This latest policy move is more than just a numbers game; it is about building a more predictable and supportive economic environment for every Kenyan. It aims to empower businesses to expand, enable families to manage their finances better, and foster a broader sense of confidence in the nation’s economic future. As Kenya continues to grow and adapt, the CBK remains a vigilant guardian, ensuring that its policies pave a clearer path towards sustainable prosperity for all.

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photo source: Google

By: Montel Kamau

Serrari Financial Analyst

11th June, 2025