Feature: The Seventh Time’s a Charm? CBK’s Latest Rate Cut and Its Impact on Borrowers.

The Central Bank of Kenya (CBK) has lowered its benchmark lending rate by 25 basis points to 9.50%, marking the seventh reduction since August 2024. The Monetary Policy Committee (MPC) announced the decision following its meeting on August 12, aiming to stimulate private-sector borrowing.

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Key Drivers for the Cut

1.  Controlled Inflation: July inflation held at 4.1%, well within the CBK’s target range (2.5%-7.5%). Core inflation rose slightly to 3.1% on higher food prices.  

2.  Economic Growth: GDP expanded by 4.9% in Q1 2025, with 2025/2026 projections at 5.2% and 5.4%.  

3.  Exchange Rate Stability: Reserves stand at $10.96 billion (4.8 months of import cover), supporting the shilling.  

4.  Current Account Improvement: Deficit narrowed to 1.6% of GDP, backed by rising exports (+7.7%) and diaspora remittances (+12.1%). 

Banking Sector Challenges 

Despite previous rate cuts, lending rates remain elevated:  

– Average commercial bank lending rates fell to 15.2% in July (from 17.2% in Nov 2024). 

– Non-performing loans (NPLs) persist at 17.6%, particularly in trade and tourism.  

– Banks’ deposit rates dropped faster than lending rates, widening profit margins.

Credit Market Developments

Private sector credit growth rose to 3.3% in July, a notable recovery from January’s -2.9% contraction. Increased lending was observed in manufacturing, trade, and construction sectors.  

Global and Domestic Risks  

While domestic conditions remain positive, the MPC noted concerns:  

– Subdued consumer demand and high business costs. 

– Oil price volatility and geopolitical tensions.

– Trade policy uncertainty affecting global growth (now projected at 3.0% for 2025). 

What Does This Mean For You:

1.For Existing Loans: If you have a loan with a variable interest rate, you should see a reduction in your monthly payments as banks adjust their rates. The average commercial bank lending rates have already fallen from 17.2% to 15.2% since November 2024, and this latest cut is likely to continue that trend.

2.The CBK is using the rate cut to further stimulate economic activity. By making credit cheaper and more available, it hopes to encourage businesses to invest and expand, which could lead to job creation and increased consumer spending.

3.The CBK also acknowledges global risks like oil price volatility and geopolitical tensions. While the domestic outlook is positive, these external factors could impact the economy in the future.

Next Steps  

The CBK will introduce a revised Risk-Based Credit Pricing model to improve transmission of rate cuts to borrowers. Governor Kamau Thugge confirmed the next MPC meeting will occur in October 2025 to assess the policy’s impact.

Governor Thugge stated: “Measures are in place to ensure inflation expectations and exchange rates remain stable. The Committee stands ready to take further action as needed.”

Source: Central Bank of Kenya, Reuters, The Star, Business Daily.

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