In a bold and unprecedented move, the Central Bank of Kenya (CBK) has slashed key interest rates in a triple-pronged policy shift aimed at pushing commercial banks to reduce lending costs and stimulate private sector growth.
The Monetary Policy Committee (MPC) yesterday cut the benchmark Central Bank Rate (CBR) by 0.75 percentage points to 10 percent the lowest it has been in nearly two years. This marks the fifth consecutive rate reduction since August 2024, resulting in a cumulative cut of 3.0 percentage points.
Despite the aggressive easing stance, the CBK has expressed concern that commercial banks have failed to fully transmit these lower rates to consumers and businesses. “The committee concluded that there was scope for a further easing of the monetary policy stance to stimulate lending by banks to the private sector and support economic activity, while ensuring exchange rate stability,” the regulator said in a statement on Tuesday.
To further tighten the screws on lenders, the CBK has reduced the interbank rate corridor—the allowable deviation of interbank lending rates from the CBR from ±1.5 percentage points to ±0.75 percentage points. This caps interbank borrowing at a maximum of 10.75 percent and a floor of 9.25 percent, with the aim of easing liquidity among banks and lowering the cost of consumer loans.
Additionally, the penalty rate for accessing emergency funds from the CBK has been slashed from 3.0 percentage points above the CBR to just 0.75 percentage points. Analysts interpret this as a strong signal from the apex bank to aggressively stimulate credit flow in the economy.
The monetary easing comes against the backdrop of global uncertainties, including heightened geopolitical tensions and reciprocal tariffs imposed by U.S. President Donald Trump. Domestically, high credit costs have subdued loan demand impacting consumption and investment.
According to CBK data, private sector credit growth remains anaemic, rising only 0.2 percent in March compared to a contraction of 1.3 percent in February. The CBK maintains that a credit growth rate between 12 and 15 percent is necessary to sustain economic momentum.
Despite the regulator’s efforts, commercial banks have been slow to act. Only five of Kenya’s 38 banks had adjusted lending rates in line with previous benchmark cuts as of February. Alarmingly, 14 banks—including Access Bank, Premier Bank, Cooperative Bank, and Ecobank increased rates during the same period. However, March saw some reprieve, with average lending rates dropping to 15.8 percent from February’s 16.4 percent.
Bank executives argue that previously locked-in high-interest deposits are limiting their ability to reduce lending rates. They are also pushing for a review of the loan-pricing formula, which they say distorts the cost of credit.
Meanwhile, the non-performing loans ratio rose to 17.2 percent in February from 16.4 percent in December, indicating growing borrower distress amid high lending costs.
The CBK’s accommodative stance is anchored on the expectation that inflation will remain below 5 percent in the near term. March inflation stood at 3.6 percent, slightly up from 3.5 percent in February.
As the CBK intensifies pressure on lenders, the coming months will be critical in determining whether banks will finally play ball and whether cheaper credit will translate into economic revival.
