CBK Lowers Key Lending Rate to 9.50% in Effort to Spur Economic Activity

The Central Bank of Kenya (CBK) has announced a significant decision by its Monetary Policy Committee (MPC) to lower the benchmark lending rate, known as the Central Bank Rate (CBR), by 25 basis points. This move, which brings the rate down to 9.50 per cent from the previous 9.75 per cent, marks the latest step in a series of cuts initiated to stimulate economic recovery and encourage lending to the private sector. The new rate is among the lowest in the country’s history and signals the CBK’s confidence in the economy’s ability to withstand both domestic and global pressures.

This decision comes at a crucial time for the Kenyan economy, which is still finding its footing after the challenges of the previous year. The CBK’s primary objective in making such a move is to signal to commercial banks that they should also reduce their lending rates, thus making it more affordable for businesses to expand, for individuals to purchase homes, and for the overall economy to gain momentum. The ripple effect of this policy is expected to be felt across various sectors, from manufacturing and agriculture to services and construction, as easier access to credit fuels investment and consumption.

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Understanding the Central Bank Rate (CBR) and its Significance

The Central Bank Rate (CBR) is arguably the most powerful tool in the CBK’s monetary policy toolkit. It serves as the interest rate at which commercial banks borrow from the Central Bank. More importantly, it acts as the reference point, or benchmark, for all other interest rates in the economy. When the CBK lowers the CBR, it effectively reduces the cost of borrowing for commercial banks. In a well-functioning financial system, this reduced cost should be passed on to customers in the form of lower interest rates on loans, mortgages, and other credit facilities.

Conversely, when the CBK increases the CBR, it makes borrowing more expensive for banks, which in turn leads to higher interest rates for their customers. This is typically done to combat high inflation by slowing down economic activity and reducing the amount of money in circulation. The current cut to 9.50 per cent is a clear signal that the CBK is now more focused on promoting economic growth rather than strictly containing inflationary pressures. This delicate balance between managing inflation and fostering growth is the core of the MPC’s mandate.

For the average Kenyan, this means that applying for a new loan or having a variable-rate loan can become cheaper. For a business owner looking to expand operations, the cost of capital is now lower, which can make a new project or investment more viable. The long-term effects of this can be seen in job creation, increased productivity, and a general improvement in the standard of living.

The Monetary Policy Committee’s Rationale: A Deep Dive

The decision to cut the CBR is not made in a vacuum. It is the result of a thorough analysis of both domestic and international economic indicators by the Monetary Policy Committee (MPC). This committee, a vital organ of the CBK, is composed of senior officials and independent experts who meet regularly to review the state of the economy. According to the CBK’s statement, their decision was based on a comprehensive assessment of three key factors: the inflation outlook, the country’s economic growth performance, and exchange rate stability.

1. The Inflation Outlook: Maintaining Price Stability

Inflation is a key measure of the change in the average price level of a basket of goods and services over time. The CBK’s mandate includes maintaining a stable price environment, with the target range for inflation typically set between 2.5 per cent and 7.5 per cent. The MPC’s report highlighted that overall inflation is expected to remain below 5 per cent in the near future. This positive outlook is primarily attributed to two factors:

• Lower Food Prices: Favourable weather conditions in key agricultural regions have led to bumper harvests, significantly reducing the cost of staple foods. As food constitutes a large portion of the consumer price index (CPI) in Kenya, a drop in food prices has a strong downward pull on overall inflation. This provides much-needed relief for households and allows them to direct more of their income towards other expenditures.
• Stability in Energy Prices: The government’s continued efforts to stabilize fuel and electricity costs, coupled with a relatively stable global crude oil market, have prevented sharp spikes in energy prices. Energy costs are a critical input for businesses and a major expense for households, so their stability is essential for controlling inflation.

With inflation well within the target range, the MPC felt it had the flexibility to ease monetary policy without the risk of an inflationary spiral. This allowed them to pivot their focus towards stimulating economic growth.

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2. Robust Economic Growth and Sectoral Performance

Another crucial factor in the MPC’s decision was the country’s encouraging economic growth performance. The report noted that the economy grew by 4.9 per cent in the first quarter of 2025. This represents a significant acceleration from the previous year, demonstrating the resilience of the Kenyan economy.

Governor Kamau, in his remarks, projected an even stronger performance for the remainder of the year. He stated that GDP growth is projected to hit 5.2 per cent this year and 5.4 per cent in 2026. This optimistic forecast is not based on a single factor but is instead driven by the strong performance and recovery of several key sectors:

• Service Sectors: The services industry, which includes telecommunications, financial services, tourism, and hospitality, has shown remarkable resilience and growth. The digital economy, in particular, continues to be a major engine of growth, attracting both domestic and foreign investment.
• Agriculture: As a cornerstone of the Kenyan economy, agriculture has bounced back strongly. Improved weather conditions, government support for smallholder farmers, and better access to markets have boosted agricultural output, contributing significantly to the overall GDP.
• Industrial Sector Recovery: The industrial sector, which includes manufacturing and construction, is also on a path to recovery. Lower borrowing costs and improved business confidence are expected to spur investment in these sectors, leading to increased production and job creation.

3. Exchange Rate Stability and Global Context

The stability of the Kenyan Shilling against major international currencies is critical for managing imports and servicing the country’s foreign debt. The MPC noted that the exchange rate has remained stable, which is a major confidence booster for investors and traders. This stability has been supported by a combination of strong remittances from the diaspora, increased foreign direct investment, and a favourable balance of trade.

However, the committee also acknowledged the presence of global uncertainties, particularly related to increased trade tariffs and ongoing geopolitical tensions. These factors could potentially complicate the economic outlook by affecting global supply chains, international commodity prices, and foreign investment flows. The CBK’s proactive stance is a way of creating a buffer against these external shocks and ensuring that the domestic economy remains robust.

The Push-and-Pull with Commercial Banks and the New Lending Model

While the CBK has consistently lowered its CBR since August 2024 from highs of 12.75 per cent, the transmission of these policy changes to commercial banks has been a persistent challenge. The original article correctly points out the “push-and-pull relationship with banks to effect lower interest rates for Kenyans.” This is a crucial point that highlights a friction point in the country’s financial system.

Commercial banks, as profit-driven entities, are not always quick to pass on the full benefit of a rate cut to their customers. They often maintain a high-interest margin, which is the difference between the interest they earn on loans and the interest they pay on deposits. This practice has led to frustration from both the CBK and the public, as the intended stimulus effect of lower rates is sometimes blunted.

The CBK has not been shy about expressing its concerns, and the report mentions that in May, the bank had “threatened to explore options, including sanctions, to force local banks to adjust their lending rates.” This strong language underscores the central bank’s commitment to ensuring that its monetary policy decisions have a tangible impact on the real economy.

This persistent issue is what has driven the discussion around a fundamental change in the lending landscape: the proposed Risk-Based Credit Pricing (RBCP) model. Governor Kamau and his committee are expected to shed more light on this proposal in their upcoming October meeting.

What is the Risk-Based Credit Pricing Model?

The RBCP model is a modern approach to lending that allows banks to price loans based on the individual risk profile of each borrower. Unlike a uniform, one-size-fits-all approach, this model uses a sophisticated credit scoring system to assess factors such as a borrower’s repayment history, debt-to-income ratio, and the overall macroeconomic environment.

The key benefits of this model are:

• Fairer Pricing: High-quality, low-risk borrowers with a strong credit history could be rewarded with significantly lower interest rates. This encourages financial discipline and good credit behaviour.
• Enhanced Financial Inclusion: It could allow banks to lend to a wider range of customers, including small and medium-sized enterprises (SMEs) and individuals who might have previously been excluded due to a perceived high-risk profile.
• Improved Efficiency: By using data analytics to assess risk, banks can make faster and more informed lending decisions, reducing the time it takes for a loan application to be approved.

However, the implementation of this model is not without its challenges. There are concerns about data privacy, the potential for discriminatory lending practices, and the need for a robust and transparent credit information sharing system. The upcoming meeting in October is highly anticipated as it is expected to provide a clear roadmap for the rollout of this transformative model and how it will be regulated.

Looking Ahead: The October MPC Meeting and Beyond

The recent rate cut is a significant development, but the story is far from over. All eyes are now on the commercial banks to see if they will respond by reducing their own rates. History has shown that this is not always a smooth process, and the CBK’s previous threats of sanctions suggest that they are prepared to take a firm stance.

The next Monetary Policy Committee (MPC) meeting, scheduled for October, will be critical. It is expected to provide further insights into the CBK’s assessment of the economy, but more importantly, it is the platform where Governor Kamau and his team are set to detail the implementation plan for the Risk-Based Credit Pricing model. This could fundamentally change how loans are priced in Kenya, moving the country’s financial sector towards a more data-driven and efficient system.

The path to sustainable economic growth is a delicate balance of managing inflation, fostering a stable financial environment, and ensuring that policy decisions translate into real-world benefits for citizens and businesses. This latest rate cut is a bold step in that direction, and its success will largely depend on the cooperation of the commercial banking sector and the effective implementation of the proposed new lending model.

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photo source: Google

By: Montel Kamau

Serrari Financial Analyst

13th August, 2025