Who benefits from CBK's low lending rates?

Two days after the Central Bank of Kenya (CBK) Governor Kamau Thugge slashed the base lending rate by 0.25 per cent, National Treasury and Economic Planning Cabinet Secretary John Mbadi announced the government’s plan to borrow Sh635.5 billion from the domestic market to fund the 2025/2026 budget.

However, with an economy reeling from high taxes and a huge debt burden that has left businesses gasping for survival, who then stands to benefit from the low interest rate? Is it the government or the private sector? Previously, the plan by the government was to borrow Sh591.9 billion from the domestic market and Sh284.2 billion externally, as contained in the Budget Policy Statement.

However, when CS Mbadi presented the budget on Thursday last week, this figure went up from Sh43.6 billion to Sh635.5 billion for the domestic debt.

The presumption is that lending should be cheaper since the inflation rate is now at 3.8 per cent as per the May 2025 figures. However, the government’s insatiable appetite for domestic debt is now a big threat to ordinary borrowers.

PKF in Eastern Africa’s chief executive Alpesh Vadher sees this as a strategic move, though with a pinch of salt, when the Kenyan figures are juxtaposed with global numbers.

He says the bonds issued by the National Treasury in the recent past have been oversubscribed, a good sign for the government. With the low inflation and lending rates, the expectation is that there will be money in circulation.

“The key issue is that, because there is so much surplus, people are going to make money every day, and they will be giving it to the banks. Banks need to lend to somebody, so they will either lend to the private sector or the government,” he explained. “But the important thing is: are we going to be able to sustain debt?”

Mr Vadher, who spoke during a pre-budget briefing by the audit and tax consultancy firm ahead of both the budget reading and CBK’s rates announcement, said interest rates in the developed economies are expected to continue dropping as the nations’ economies are consumption based.

A higher interest rate in these markets means a contracted economy. As such, the shilling is expected to at least maintain its value against the US dollar, which then should work to the government’s advantage. From the MPC’s communication on June 10, which informed the reduction of interest rates from 10 to 9.75 per cent, CBK’s foreign exchange reserves stood at Sh1.4 trillion ($10.8 billion) - 4.75 months of import cover.

CBK boss said this buffer is at their highest level and will continue to provide adequate cover and a cushion against any short-term shocks in the forex market. In March, reserves were at a then all-time high of Sh1.3 trillion ($10.1 billion).

Yet Mr Vadher said CBK’s MPC should not reduce the rates further, pegging it on the 4.1 per cent inflation rate as recorded in April before it dropped to 3.8 per cent in May. “I don’t think the rates will reduce. I think they will be kept on hold because inflation is slightly climbing,” he said.

Dr Thugge, who is the MPC chair, noted that there was room to reduce the rates further to stimulate the banks to lend more. “Central banks in the major economies have continued to lower their interest rates, but at a more cautious pace depending on inflation and economic growth expectations,” he said.

He noted that average lending rates in the domestic market have continued to reduce, currently at about 15 per cent, while private sector credit growth has recovered modestly.

“The MPC will closely monitor the impact of this policy decision as well as developments in the global and domestic economy and stands ready to take further action as necessary in line with its mandate,” said the MPC chair.

He listed credit to manufacturing as one of the metrics that shows banks have unclenched their fists, as figures showed that lending to this sector has moved from a contraction of 14.3 per cent in September 2024 to one per cent in May 2025. “Still small, but it is in the right direction,” he said.

Severally, economists have been conservative about the push from CBK to reduce interest rates since the first reduction in August 2024 when the rate then stood at 13.0 per cent as raised in the April 2024 MPC meeting.

Christopher Legilisho, an economist with the Standard Bank Group, called for restraint in the excitement from the reduction of the rates.

He warned that the benefit depends on whether the government will exercise restraint and reduce borrowing from the local market, which risks crowding out the private sector. “If we see the government trying to restrain how much they borrow, you will have lower rates. If we see the government’s appetite for borrowing increasing, the interest rates will likely start picking up again,” said Mr Legilisho during a presentation on the 2025 economic outlook at a pension industry event organised by Enwealth Financial Services.

The plan by CS Mbadi to borrow Sh635.5 billion from the domestic market, amid a shrinking external option, risks crowding out the private sector.

In his statement on budget day last week, CS Mbadi said the government will be keen to ensure the market factors such as inflation and interest rate, remain stable. The CS noted that with the easing of the monetary policy stance, interest rates have been declining, which has also benefited the government as it paid less interest on Treasury bonds and bills.

He gave an example of the 91-day Treasury bills rates that have declined from an average of 15.9 per cent in May 2024 to 8.3 per cent by May 2025 while the average commercial bank lending rates that peaked at 17.2 per cent in November 2024 have since declined to 15.7 per cent in April 2025, and are expected to decline further.

“This decline has not only reduced the cost of government debt but is also expected to stimulate lending by banks to the private sector and support economic activity,” he said.

The crowding out effect has also been pointed out in a report by the National Assembly Budget and Appropriation Committee chaired by Alego Usonga MP Samuel Atandi.

“The committee noted that despite the declining interest rates on government securities locally due to easing monetary policy stance, continued reliance on domestic borrowing may either crowd out credit to the private sector or result in high borrowing costs,” reads the June 2025 report that analyses the 2025/2026 budget estimates.

But again, PKF in Eastern Africa’s chief executive said, it is up to the National Treasury and CBK to decide how they seek to balance their books. A major upside of reduced interest rates at the moment, he said, is that CBK has enough forex buffers, which would protect the shilling from further depreciation.

The question, however, is what benefit does a lower interest rate have to investors? “If we reduce our rates further, investors will ask: ‘Should I earn six to seven per cent on Kenyan bonds or six to seven per cent on US  dollar bonds, which is going to appreciate in the time to come?” posed Mr Vadher.

He warned that a further reduction in interest rates would devalue the shilling. “And let us not forget our inflation (in African economies) is higher than the rest of the world. They are always below 2.0 or 2.5 per cent, and our target is between 5.0 and 7.5 per cent,” said the PKF regional boss.

He further advised that a right balance needs to be struck. “If we continue reducing our rates, then we could get a hit on our exchange, and then foreign debt will increase in local currency as well,” he said. “It is up to the CBK and National Treasury to decide which way forward.”