CBK lowers rate amid push for more credit access

The Central Bank of Kenya (CBK) cut its benchmark interest rate on Tuesday and took technical steps designed to push commercial lending costs lower, a move aimed at stimulating the economy and delivering on political promises of affordable credit by the Ruto administration ahead of the 2027 general elections.

 The Monetary Policy Committee (MPC) lowered the Central Bank Rate (CBR) by 25 basis points to 8.75 per cent, marking the tenth consecutive cut since August 2024 and following a similar reduction in December 2025. 

 The Committee also approved a narrowing of the interest rate corridor around the CBR from ±75 basis points to ±50 basis points, a technical adjustment intended to strengthen monetary policy transmission and ensure interbank rates align more closely with the benchmark.

 "The Committee therefore concluded that there was scope for a further easing of the monetary policy stance," said CBK Governor and MPC Chairman Dr Kamau Thugge in a statement after the meeting. 

 “Having considered these developments, the Committee therefore concluded that there was
scope for a further easing of the monetary policy stance by reducing the CBR by 25 basis points.”

 He said the cut would "augment the previous policy actions aimed at stimulating lending by banks to the private sector and supporting economic activity, while ensuring inflationary expectations remain firmly anchored, and the exchange rate remains stable."

 The rate cut is designed to stimulate the economy by encouraging commercial banks to lower their own lending rates, thereby reducing borrowing costs for businesses and consumers. 

 Cheaper credit can spur investment, hiring, and consumer spending, supporting broader economic growth. 

 However, it remains to be seen whether banks, which are still managing elevated levels of non-performing loans, will fully pass on the lower borrowing costs to their customers.

 The MPC’s decision was framed against a backdrop of cautious global optimism and improving domestic indicators. 

The Committee noted that "global growth has remained resilient" at 3.3 per cent, with an improved outlook for 2026, but flagged "elevated trade policy uncertainty and heightened geopolitical tensions" as key risks.

 Domestically, the Committee found room for easing in consistently manageable inflation and signs of economic resilience. 

“Kenya's overall inflation declined to 4.4 per cent in January 2026... and remained below the mid-point of the target range of 5±2.5 per cent,” the MPC said. It added that “overall inflation is expected to remain below the midpoint of the target range in the near term.”

 On the economy, the Committee pointed to underlying strength, noting the performance of the economy remained resilient in the third quarter of 2025, with real GDP growing by 4.9 per cent. The outlook was revised upwards, with the economy expected to "pick up to 5.5 per cent in 2026," supported by the resilience of the services sector and continued recovery in industry.

 The MPC decision represents a win for borrowers and businesses, who have long complained of high costs of capital. 

 It is also seen as a critical nod to mounting political pressure to make credit more accessible. 

 President William Ruto's flagship promise to provide cheap "hustler" loans to small businesses has been hampered by a prolonged period of high-interest rates.

 "The CBK is clearly trying to usher in a lower cost of loans to stimulate the economy and put money in the pockets of borrowers firms and individuals," said an economist with a regional brokerage, who asked not to be named. "It's a direct stimulus, but the challenge remains getting banks to fully pass it on."

 The MPC's decision came despite a day earlier call for caution from the powerful industry lobby, the Kenya Bankers Association (KBA), which had urged the committee to hold rates steady to allow for a smooth transition of all variable-rate loans to a new Risk-Based Credit Pricing Model (RBCPM). 

 The Committee itself acknowledged that the revised RBCPM, "which will be fully operational by March 2026, will improve the transmission of monetary policy decisions to commercial banks' lending interest rates." 

 However, it proceeded with easing, also approving "the adjustment of the applicable interest rate on the Discount Window... to 50 basis points, which is the upper bound of the interest rate corridor."

 The MPC highlighted improvements in the financial sector that support further easing.

  “The banking sector remains stable and resilient, with strong liquidity and capital adequacy ratios,” the statement said.

 It said “the ratio of gross non-performing loans (NPLs) to gross loans stood at 15.5 per cent in January 2026, down from 16.7 per cent in October 2025.” The Committee noted decreases in NPLs across key sectors like manufacturing, trade, and real estate.

 It noted, “growth in commercial banks' lending to the private sector continued to improve and stood at 6.4 per cent in January 2026 compared to 5.9 per cent in December 2025,” a sign that previous policy actions are gaining traction. 

 “Growth in credit to key sectors... remained strong,” the Committee observed, “reflecting improved demand for credit in line with the declining lending interest rates.”

 However, the CBK’s room to manoeuvre is constrained by a massive government borrowing plan, analysts warn. 

 The Treasury's draft budget shows a total borrowing requirement of Sh1.01 trillion for the 2026/27 fiscal year, with 82 per cent slated to come from the domestic market. This has stoked persistent fears of "crowding out," where state borrowing keeps market rates high irrespective of the CBK's policy stance.

 Governor Thugge said the MPC would "closely monitor the impact of these policy decisions as well as developments in the global and domestic economy and stands ready to take further action as necessary." The Committee's next meeting is in April this year.