Kenya’s central bank cut its benchmark interest rate by a quarter percentage point on Monday, trimming borrowing costs for the third consecutive quarter as policymakers seek to accelerate economic growth against a backdrop of easing inflation and improving credit conditions.
The Monetary Policy Committee of the Central Bank of Kenya lowered the Central Bank Rate from 9.0 percent to 8.75 percent, a decision announced following a regular MPC session in Nairobi. The move signals continued confidence that price stability is entrenched enough to allow the bank to pivot toward stimulating activity.
Easing Inflation Gives Policymakers Room to Act
CBK Governor Kamau Thugge, who chairs the MPC, said conditions were right to loosen monetary policy without risking a resurgence in inflation or putting pressure on the Kenyan shilling.
“This step is intended to support lending to the private sector and stimulate economic activity while keeping inflation expectations firmly anchored,” Thugge told reporters after the committee’s decision.
Overall inflation fell to 4.4 percent in January, down from 4.5 percent in December, remaining below the midpoint of the government’s 2.5-to-7.5 percent target range. Non-core inflation, which captures volatile food and energy prices, dropped sharply to 10.3 percent from 11.2 percent, driven largely by lower prices for tomatoes and onions. Core inflation edged up to 2.2 percent, reflecting modest price increases for processed foods, including maize flour.
“We will continue to evaluate economic conditions, inflation trends, and financial sector stability to ensure our policy actions remain effective and supportive of growth.”
— Kamau Thugge, CBK Governor & MPC Chair
Growth Holds Steady Despite Agricultural Drag
Kenya’s economy showed resilience through 2025, with real gross domestic product expanding 4.9 percent in the third quarter, bolstered by a recovery in industry and steady services output. Full-year 2025 growth is estimated at 5.0 percent — slightly below the earlier forecast of 5.2 percent, largely because of weaker-than-expected agricultural performance.
Looking ahead, the MPC projects the economy will grow 5.5 percent in 2026 and 5.6 percent in 2027, fueled by continued strength in services, an industrial rebound, and stabilising farm output. Those figures would rank Kenya among the faster-growing economies in sub-Saharan Africa.
Private sector credit growth accelerated to 6.4 percent in January from 5.9 percent in December, while average commercial bank lending rates dipped to 14.8 percent from 15.0 percent — a modest but meaningful relief for businesses and households that have faced years of elevated borrowing costs.
Banking Reforms and Global Risks on the Horizon
The MPC also approved a narrowing of the interest rate corridor around the Central Bank Rate — tightened from 75 basis points to plus or minus 50 basis points — a technical adjustment designed to align overnight interbank rates more closely with the policy rate and make borrowing costs more predictable. The discount window’s upper bound was reduced from 75 to 50 basis points above the CBR.
Thugge said a revised Risk-Based Credit Pricing Model will be fully operational by March 2026, intended to sharpen the transmission of monetary policy into commercial lending rates and improve loan-pricing transparency across the banking sector.
Internationally, the MPC flagged a mixed backdrop. Global growth held at an estimated 3.3 percent in 2025, supported by strong U.S. consumer spending and surging investment in artificial intelligence. But the committee cited risks from weak global demand, ongoing geopolitical tensions in the Middle East, and uncertainty stemming from the Russia-Ukraine conflict.
Non-performing loans in Kenya’s banking system declined to 15.5 percent in January from 16.7 percent in October, with improvements recorded across real estate, manufacturing, trade, and construction — a sign that credit quality is gradually recovering even as global conditions remain uncertain.
The MPC is next scheduled to convene in April 2026. Thugge said the bank would continue monitoring both domestic and global developments and stood ready to adjust policy if conditions warranted.
