Central Bank of Kenya cuts interest rates to lower borrowing cost, Boost Economic Growth

The Central Bank of Kenya (CBK) has slashed its benchmark interest rate by 75 basis points, lowering the key rate to 10% from 10.75%, marking the lowest level since May 2023. This action is the fourth consecutive cut by the CBK since August 2024, bringing the total reduction to 275 basis points.

The CBK also halved the interest rate corridor from ±150 to ±75 basis points, aiming to enhance monetary policy transmission and stabilize interbank rates. By halving the corridor, the CBK aims to reduce volatility and improve the effectiveness of its monetary policy. foster confidence among financial institutions, potentially amplifying the impact of the benchmark rate cut on the broader economy

Annual inflation has been below the 5% midpoint of the central bank’s target range since June. It quickened to 3.6% in March from 3.5% a month earlier, and core price growth accelerated to 2.2%, compared with 1.9% in February.

Kenya’s banking sector non-performing loans (NPL) ratio stood at a high of 17.2%, compared to 16.4% in 2024. This means that nearly one in five loans is at risk of default, straining bank profitability and curbing lending appetite. The CBK hopes that lower interest rates will ease repayment burdens, reducing NPLs over time. Yet, with credit risk looming, banks may adopt a cautious approach, prioritizing safer borrowers over riskier sectors.

Interest Rate Cut: A Push for Economic Growth

Kenya’s economy slowed in 2024 with real GDP at 4.6% compared to 5.6% in 2023, reflecting a deceleration of growth. The CBK’s latest rate cut is designed to lower borrowing costs, encouraging businesses and households to access credit and drive investment.

The cumulative 275-basis-point reduction since August 2024 underscores the CBK’s aggressive stance to revive economic activity.

Cheaper loans could spur consumption and infrastructure spending, key drivers of Kenya’s GDP growth. However, the success of this policy hinges on commercial banks passing these savings to borrowers a hurdle given the increasing NPL ratio.

On the external front, Kenya’s economy shows strength with a BOP surplus of US$1.38 billion and a current account deficit shrinking to 3.1% of GDP.

This improvement stems from robust export growth, reduced oil import costs, and a significant boost from diaspora remittances rising 14.5%.

The CBK’s foreign exchange reserves currently stand at $9.9 billion, thanks to inflows from a $1.5 billion March Eurobond issuance to re-arrange debts.

The local currency has remained locked in a narrow range around 129 per dollar this year, after being the world’s best performer in 2024.

The East African nation needs to raise $26 billion in the next decade to pay maturing foreign debts and another $1.5 billion annually to meet external interest payments.

Kenya is the first central bank in Africa to cut its key interest rate since Trump announced sweeping tariffs on April 2 that have rattled markets, raised concerns of a recession in the US, and increased the cost of debt

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