CBK Cuts to 8.75%: Kenya Enters a New Monetary Phase as Credit Rebounds and Bank Risks Ease

Kenya has entered a decisive new monetary phase.

The Central Bank of Kenya (CBK) has reduced its benchmark policy rate to 8.75%, marking the tenth consecutive rate cut since August 2024. The 25-basis-point reduction pushes borrowing costs to their lowest level since January 2023 and extends one of the longest easing cycles in Kenya’s recent monetary history.

But this is not simply a rate cut story.

It is a broader narrative about financial system repair, inflation control, credit revival, and the delicate balance between supporting growth and preserving macroeconomic stability.

The decision comes at a time when:

• Inflation remains contained at 4.4%, comfortably within the CBK’s 2.5%–7.5% target band and below the 5% midpoint.
• Private-sector credit growth has accelerated to 6.4%, up from 5.9% in December and a sharp reversal from contractionary levels a year earlier.
• Non-performing loans (NPLs) have fallen meaningfully from their peak, signaling balance sheet repair in the banking sector.
• Foreign exchange reserves stand at US$12.46 billion, equivalent to 5.37 months of import cover, providing an external buffer.
• GDP growth remains resilient, expanding 4.9% in Q3 2025, with projections of 5.5% in 2026 and 5.6% in 2027.
  

In isolation, any of these metrics would justify cautious optimism. Together, they suggest that Kenya’s macro-financial architecture is stabilizing after a period of tightening, stress, and adjustment.

However, easing cycles always come with questions:

• Is the recovery durable?
• Are banks truly out of the woods?
• Could inflation reaccelerate?
• Is the external position strong enough to absorb shocks?
• And what risks lie beneath the surface?

This article examines the significance of the CBK’s tenth consecutive rate cut, compares it to previous yield cycles, analyzes systemic implications, outlines risks to monitor, and evaluates the long-term outlook for Kenya’s monetary and banking system.

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Why the Tenth Cut Matters

A tenth consecutive rate reduction is not routine monetary fine-tuning. It signals conviction.

Since August 2024, the CBK has steadily shifted from tightening toward accommodation. The cumulative easing has brought the Central Bank Rate (CBR) down to 8.75%, reflecting confidence that inflation expectations are anchored and that the currency can withstand lower rates.

This is notable because Kenya, like many emerging markets, must balance two competing priorities:

1. Supporting domestic growth through affordable credit.
   
2. Maintaining external stability to avoid currency volatility and capital flight.

The fact that inflation remains at 4.4% — below the midpoint of the target band — gives policymakers room to maneuver. Core inflation has edged up slightly to 2.2%, but remains subdued. Non-core inflation has eased to 10.3%, helped by lower vegetable prices.

These dynamics suggest that price pressures are not broad-based.

The CBK is effectively signaling that the risks of keeping rates too high — slowing credit, suppressing investment, weakening bank balance sheets — now outweigh the risks of inflation resurgence.

Banking Sector Cleanup: The Real Story Behind the Rate Cut

Perhaps the most critical factor behind the rate decision is the improvement in asset quality.

Gross non-performing loans (NPLs) have fallen to 15.5% in January 2026, down from 16.5% in November 2025 and more than 200 basis points below the March 2025 peak of 17.4%.

To understand why this matters, consider the trajectory:

• December 2023: 14.8%
• June 2025: 17.6%
• March 2025 peak: 17.4%
• January 2026: 15.5%

The rise from 14.8% to 17.6% represented a period of significant stress. Sectors including real estate, trade, manufacturing, and households struggled under high borrowing costs and slowing growth.

But since mid-2025, banks have repaired balance sheets steadily. Asset quality improvements across real estate, construction, trade, and consumer lending point to better underwriting, restructuring efforts, and improved borrower capacity.

Why does this justify rate cuts?

Because monetary easing works best when banks are healthy. If balance sheets are impaired, lower policy rates do not translate into increased lending.

Now, with asset quality improving, rate transmission becomes more effective.

Credit Growth Rebounds: A Clear Inflection

Private-sector credit growth has risen to 6.4% in January, up from 5.9% in December. More importantly, it represents a dramatic reversal from a 2.9% contraction a year earlier.

Average lending rates have eased to 14.8%, down from 17.2% in November 2024.

This shift matters for several reasons:

1. It indicates improved borrower confidence.
   
2. It suggests banks are willing to extend credit again.
   
3. It reflects effective transmission of monetary easing.
   
4. It signals that economic activity is stabilizing.
   

Credit growth is particularly strong in building and construction, trade, and consumer durables — sectors that tend to respond quickly to rate relief.

In many economies, credit cycles lag monetary policy by several months. The acceleration to 6.4% suggests Kenya’s banking system is responding as intended.

The Benchmark Debate: CBR vs KESONIA

The rate cut also coincides with evolving loan pricing frameworks.

Major banks — Equity, KCB, and NCBA — have aligned new variable-rate loans to the CBR plus a customer-specific premium.

Meanwhile, Co-operative Bank has chosen to anchor existing variable-rate loans fully to KESONIA, the Kenya Shilling Overnight Interbank Average.

This divergence matters.

CBR-based pricing keeps policy transmission directly tied to the central bank’s decisions. KESONIA-based pricing reflects interbank market conditions more dynamically.

A transition toward KESONIA reflects modernization and market-based benchmarks — similar to global transitions away from LIBOR to SOFR or SONIA.

Over time, a more market-driven benchmark could improve transparency and risk pricing, but the shift must be managed carefully to avoid borrower confusion.

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External Stability: The Guardrails for Easing

Kenya’s current account deficit widened to 2.4% of GDP in 2025, from 1.3% in 2024. Imports rose 9.1%, outpacing export growth of 6.1%.

On the surface, a widening deficit can be concerning during an easing cycle. Lower rates can pressure currencies if capital outflows accelerate.

However, several buffers exist:

• Travel receipts and remittances remain supportive.
  
• The deficit is expected to stabilize at 2.2% in 2026–27.
  
• Foreign exchange reserves stand at US$12.46 billion (5.37 months of import cover).
  

Five months of import cover provides comfort by international standards, exceeding the traditional three-month threshold often considered adequate.

This reserve position gives the CBK confidence that easing will not destabilize the shilling.

Comparing This Easing Cycle to Previous Yield Cycles

Kenya has experienced several rate cycles over the past decade.

The Tightening Phase (2022–2023)

During global inflation surges, central banks tightened aggressively. Kenya raised rates to contain inflation and defend the currency amid global shocks and domestic fiscal pressures.

The result:

• Lending rates climbed.
  
• Credit growth slowed.
  
• NPLs rose.
  
• Economic sectors felt strain.
  

That period resembled global tightening cycles seen in other emerging markets, where central banks prioritized price stability over growth.

The Transition Phase (Late 2024)

As inflation moderated and currency pressures eased, the CBK shifted cautiously.

The difference between this cycle and earlier ones lies in:

1. The scale of banking sector repair before easing accelerated.
   
2. Stronger reserve buffers.
   
3. Improved fiscal coordination.
   
4. A more structured benchmark framework.
   

Historically, premature easing in emerging markets has triggered currency weakness. This time, easing has been gradual and data-driven.

Risks to Monitor

No easing cycle is risk-free.

1. Inflation Reacceleration

Although headline inflation is stable, food and energy prices remain volatile globally. Weather shocks could quickly lift food inflation.

2. External Financing Conditions

If global rates rise or risk appetite falls, capital inflows may weaken. Kenya’s reserves are strong, but external shocks remain possible.

3. Credit Quality Slippage

If banks ease standards too aggressively, NPLs could rise again.

4. Fiscal Pressures

Sustained deficits could crowd out private borrowing or complicate monetary policy coordination.

5. Currency Sensitivity

Lower rates reduce carry attractiveness. The shilling’s stability depends partly on continued confidence in policy discipline.

Long-Term Outlook: A Healthier Financial Cycle Emerging?

If current trends hold, Kenya could enter a multi-year period characterized by:

• Moderate inflation.
  
• Improving credit expansion.
  
• Lower but stable lending rates.
  
• Stronger asset quality.
  
• Gradual benchmark modernization.
  

GDP growth projected at 5.5% in 2026 and 5.6% in 2027 suggests that policymakers believe the economy is not overheating.

The key determinant will be whether credit growth translates into productive investment rather than speculative bubbles.

Looking Ahead: What Comes Next?

Several forward-looking themes deserve attention.

1. Will the CBK Cut Further?

With inflation below midpoint and reserves strong, additional cuts are possible if global conditions remain stable.

2. Will Lending Rates Fall Further?

Average lending rates at 14.8% remain elevated by historical standards. Further easing could support SMEs and household borrowers.

3. Will KESONIA Replace CBR Over Time?

A gradual shift toward market-based benchmarks would align Kenya with global best practice.

4. Will Credit Growth Sustain Above 7–8%?

Sustained expansion would signal a durable recovery.

Conclusion: A Delicate but Well-Timed Easing

The CBK’s tenth consecutive rate cut is not merely symbolic. It reflects confidence in inflation control, bank balance sheet repair, and external stability.

Kenya appears to be navigating a controlled transition from tight policy toward growth support without sacrificing macro stability.

However, vigilance remains essential. Easing cycles reward discipline but punish complacency.

If inflation remains anchored, reserves hold firm, and credit quality continues improving, Kenya could emerge from this phase with a more resilient banking sector and a stronger growth trajectory.

But if global shocks intensify or domestic imbalances resurface, policymakers may have to recalibrate.

For now, the signal is clear: the CBK believes the system is strong enough to breathe easier.

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photo source: Google

By:Elsie Njenga

17th February, 2026