Analysts watch out for fresh rate cut decision as MPC holds crucial meeting
Despite pressure from CBK for banks to lower their lending rates, including threats of fines, few have complied
The Monetary Policy Committee (MPC) is meeting today with analysts divided on whether it should further cut the Central Bank Rate (CBR) to offer banks more latitude to reduce lending rates.
While some predict that the MPC, which is chaired by Central Bank of Kenya Governor Dr Kamau Thugge, is likely to retain the signal rate at 10.75 per cent, researchers at the Kenya Bankers Association (KBA) hold that there is still headroom to accommodate a further CBR cut to provide a stronger impetus and sustain the momentum for lending rate reductions in the market and unlock private sector credit growth.
In a research note, KBA says inflation remains low and stable, and inflation expectations are well anchored within the target range in the near term while economic activity though resilient, appears fragile on weak credit growth as well as emerging global trade and inflation risks.
Headline inflation edged up slightly to 3.6 per cent in March 2025 from 3.5 per cent in February, driven by an increase in core inflation to 2.2% from 1.9% over the period. Non-core inflation, however, eased to 7.4 per cent from 7.7 per cent in February. In terms of their contributions to overall inflation, core inflation pushed up overall
inflation by 2.3 percentage points as non-core inflation contributed 1.3 percentage points.
The IMF projects Kenya’s real GDP growth at 5.0 % in both 2025 and 2026, driven by a robust agricultural sector and rising exports. However, KBA notes that emerging protectionist trade policies in the US that may filter through other advanced markets, could push global inflation higher and slowdown the pace of monetary policy
easing. This would keep the US dollar stronger against other major currencies, and lead to higher import costs and potential inflationary pressures in frontier economies such as Kenya.
At the same time, KBA notes that there is weak transmission of monetary policy rate cuts effected in the previous months that, together with elevated credit risk, continue to constrain bank lending to the private sector.
While the MPC on February 6 lowered the Central Bank Rate (CBR) by 50 basis points to 10.75 per cent and the Cash Reserve Ratio (CRR) by 100 basis points to 3.25 per cent, implementation of the CBR cut through CBK monetary operations led to a decline in the interbank rate to 10.68 per cent by March 28; aligning the latter to interbank market corridor of CBR +/- 150 basis points.
Since August 2024 when the MPC started reducing the CBR (cumulatively by 225 basis points by end March 2025), the interbank rate has declined by about 252 basis points reflecting effective CBR transmission to the short end of the market yield curve.
“However, acknowledging the presence of transmission lags in the market particularly to the longer-dated credit
facilities, the average lending rate in the market continued to increase (in response to the CBR hike that had been
effected and sustained at 13.00% for 6 months to August 2024) to 17.22% by November 2024, before declining
steadily to 16.44% in February 2025. Since November 2024, the average lending rate has declined by 78 basis
points compared to a decline in average deposit rates by 65 basis points to 9.76% in February 2025,” it notes.
Despite pressure from CBK for banks to lower their lending rates, including threats of fines, few have complied with KBA saying that the process of determining lending rates is guided by risk-based credit pricing model, in which each bank assesses the borrower’s risk profile and adjusts the loan interest rate accordingly.
“Loan pricing is influenced by a bank’s base rate as well as a customer-specific risk premium. The base rate reflects key factors such as the Central Bank Rate and the cost of government borrowing, while the risk premium considers the customer’s credit risk, which can be influenced by their credit history, ability to repay, and the general economic environment. Borrowers with strong credit profiles receive lower rates, while higher-risk customers are charged a premium,” it said in a statement after the February 6 cut.
KBA has also cited several economic pressures it says continue to weigh on lending conditions. These include the rising cost of living, which has reduced consumers’ capacity to service loans; the ongoing challenge of delayed payments to businesses, particularly in sectors dependent on government contracts; and reduced consumer demand due to shrinking disposable incomes.
According to the industry lobby, these factors contribute to higher consumer risk, which affects banks’ capacity to offer lower interest rates to all borrowers.
