Kenya’s Central Bank has lowered its benchmark lending rate by 25 basis points to 9.75 per cent, in a strategic move aimed at stimulating private sector borrowing and supporting overall economic recovery. The decision was made during the Monetary Policy Committee (MPC) meeting held on June 10, 2025, and comes amid signs of a rebound in economic activity despite persistent external challenges.
Slower Economic Growth in 2024
The MPC noted that Kenya’s economy expanded by 4.7 per cent in 2024, a deceleration from the 5.7 per cent growth recorded in 2023. The slowdown was attributed to weaker performance across several sectors, especially industry and trade. External pressures, including volatile global markets and high import costs, also weighed on growth.
However, the economy is showing signs of renewed momentum in early 2025. Sectors such as agriculture and services have demonstrated resilience, supported by improved weather conditions, growing domestic demand, and stronger export performance. As a result, the GDP growth projection for 2025 has been revised slightly to 5.2 per cent, down from the earlier forecast of 5.4 per cent.
Monetary Easing to Boost Credit Growth
The rate cut by the Central Bank marks a shift in Kenya’s monetary policy stance following earlier tightening aimed at taming inflation and stabilizing the exchange rate. CBK Governor Dr. Kamau Thugge, who chairs the MPC, emphasized that the current macroeconomic environment provides room for further easing.
“In view of the prevailing macroeconomic conditions, the Committee concluded that there was scope for a further easing of the monetary policy stance,” said Dr. Thugge. “This is aimed at stimulating lending by banks to the private sector and supporting economic activity, while ensuring inflation expectations remain firmly anchored and the exchange rate remains stable.”
Private Sector Credit Shows Recovery
There are early signs that monetary easing is beginning to yield results. According to the MPC, commercial bank lending to the private sector grew by 2.0 per cent in May 2025, a marked improvement from 0.4 per cent in April and a contraction of 2.9 per cent in January. The pickup in credit aligns with a gradual decline in average lending rates, which fell to 15.4 per cent in May from 17.2 per cent in November 2024.
This upturn in credit activity is seen as critical for sustaining economic momentum, especially in sectors like manufacturing, agriculture, and services that are heavily reliant on financing for growth.
Inflation Trends Remain Contained
Kenya’s inflation environment continues to improve, providing further support for the Central Bank’s accommodative policy. Overall inflation declined to 3.8 per cent in May 2025, down from 4.1 per cent in April. This places inflation well within the government’s target range of 5±2.5 per cent.
The decline was largely attributed to lower food and energy prices, driven by improved supply conditions and recent reductions in electricity tariffs. Fuel prices have also stabilized in recent months, contributing to the decline in headline inflation.
Meanwhile, core inflation—which excludes volatile food and energy prices—rose slightly to 2.8 per cent in May, up from previous levels. Despite this marginal uptick, the MPC expects inflationary pressures to remain well-contained in the near term, citing stable demand conditions and a relatively strong shilling.
Focus on Stability and Recovery
The Central Bank reiterated its commitment to maintaining price stability and promoting financial sector soundness, while ensuring that the economy continues on its recovery path.
“The Committee will continue to closely monitor the impact of this policy decision, as well as developments in the global and domestic economy,” said Dr. Thugge. “It stands ready to take further action as necessary in line with its mandate.”
The MPC also emphasized its readiness to act should inflation rise unexpectedly or if currency pressures re-emerge due to external shocks such as higher oil prices or tighter global financial conditions.
Exchange Rate Outlook and External Pressures
While the Central Bank did not explicitly comment on the exchange rate during its June meeting, analysts suggest that the easing policy could exert some downward pressure on the Kenyan shilling. However, improving export performance and a narrowing current account deficit are expected to help mitigate risks of significant currency volatility.
Kenya’s export sector has benefitted from higher global tea and horticulture prices, while the recovery in tourism and remittances continues to bolster foreign exchange inflows. Nevertheless, the country remains vulnerable to fluctuations in international commodity prices and external debt servicing obligations.
Looking Ahead: Policy Direction and Expectations
With the next MPC meeting scheduled for August 2025, market participants will be closely watching inflation data, credit growth trends, and global market developments for clues on the future direction of interest rates. If inflation remains within the target band and credit continues to expand, there may be scope for further rate cuts to support growth.
The Central Bank’s latest policy shift marks a delicate balancing act—stimulating growth and credit access while safeguarding the broader stability of the economy. As Kenya navigates the post-pandemic recovery phase and the lingering effects of global shocks, the effectiveness of these monetary measures will be crucial in shaping the economic outlook for the rest of 2025.