The Central Bank of Kenya (CBK) has started the year by lowering the Central Bank Rate (CBR) from 11.25% to 10.75%, marking the first time the Monetary Policy Committee (MPC) has started the year with a decrease to the rate since 2020.
With this decision, the government aims to boost economic activity and encourage credit growth while ensuring exchange rate stability.
In addition to the CBR cut, the MPC also lowered the Cash Reserve Ratio (CRR) by 100 basis points from 4.25% to 3.25%. These measures are intended to work together, with the reduction in the CRR expected to increase liquidity in the banking sector, thereby reducing the cost of funds and prompting banks to lower lending rates.
While the CBR has been significantly reduced since August 2024, lending rates have only seen a marginal decline. Banks have continued to maintain high interest rates, with the average lending rates still above 16% as of December 2024.
In accordance to the Committee, these latest measures will encourage banks to take the necessary steps to further reduce their lending rates, thereby stimulating credit growth to the private sector and supporting economic activity. To ensure compliance, the CBK has begun on-site inspections of banks to verify that they are aligning their interest rate reductions with the Risk-Based Credit Pricing Model (RBCPM).
In fact, recent amendments to the Banking Act, have now empowered the CBK to penalize any bank that fails to pass on the benefits of reduced funding costs to borrowers.
These high interest rates from commercial banks and lack of access to capital, especially for small businesses, have continued to contribute to the slowing of Kenya’s economy. This is evident in the country’s real GDP growth declining to 4.6% in 2024 from 5.6% in 2023, as most sectors experienced a decline.
Despite the gloom experienced last year, the government forecasts that the economy will bounce back, projecting that it real GDP growth will stand at 5.4% in 2025. This is set to be above the projected global GDP growth which is forecast at 3.3% from the 3.2% in 2024.
This projected growth is expected to be supported by the resilience of key service sectors and agriculture, an anticipated improvement in credit growth to the private sector, and stronger export performance. However, the outlook remains subject to both domestic and external risks.
While inflation slightly increased in the first month of year to stand at 3.3% from 3% as at the end of December 2024, it remains relatively stable as it is still below the midpoint of the target range of 5±2.5%. Core inflation, which excludes volatile items, decreased to 2% in January from 2.2% in December, reflecting subdued demand pressures. This decline was largely due to lower prices of processed food items such as sugar, maize, and wheat products.
On the other hand, non-core inflation, managed to increase from 5.2% in December to 7.1% in January, primarily driven by higher prices of food crops and related items, particularly vegetables, influenced by seasonal factors. Lower energy and utilities inflation, supported by reduced electricity and pump prices, helped to moderate the non-core inflation.
Additionally, as of February 2025, CBK currently holds substantial foreign exchange reserves, amounting to Sh1.17 trillion ($9.07 billion), which is equivalent to 4.63 months of import cover. These reserves act as a critical safeguard against potential short-term disruptions in the foreign exchange market, ensuring economic stability.
The government is also rolling out the FY2024/25 Supplementary Budget I, which is designed to lower the fiscal deficit from 5.3% of GDP in FY2023/24 to 4.3%. This fiscal tightening is aimed at improving debt sustainability by bringing the present-value-of-debt to GDP ratio nearer to the target of 55%.
Together, the strong foreign exchange reserves and the disciplined fiscal approach through the supplementary budget highlight the country’s efforts to uphold macroeconomic stability and strengthen its economic foundation for the future.
With the next MPC meeting scheduled for April 2025, the committee has the mandate to continue monitoring the impact of these policy measures and developments in both the global and domestic economy. If in the next two months, the economy remains the same, or further slows down, the government might be forced to reduce the CBR once again.
