The Central Bank of Kenya has embarked on a dramatic U‑turn in monetary policy that is poised to reduce borrowing costs and reshape lending dynamics across the country.
Between February and June 2025, the Monetary Policy Committee slashed the Central Bank Rate (CBR) from 11.25 percent to 9.75 percent through four consecutive cuts, in tandem with reductions of the Cash Reserve Ratio (CRR) to release liquidity into the banking system.
The policy reversal signals a shift in CBK strategy from monetary tightening toward supporting credit growth and economic recovery. CBK Governor Kamau Thugge explained that falling inflation, exchange rate stability, and slower growth justified the shift.
The down‑rating of the CBR and CRR is expected to free up tens of billions of shillings that would otherwise sit in central reserves, intended to lower banks’ cost of funds and force reductions in loan pricing.
However, banks have been slow to transmit these benefits. Despite the cuts, average commercial loan rates in December 2024 and early 2025 lingered between 16 and 17 percent well above the policy rate and far exceeding earlier projections.
In response, CBK has initiated on-site inspections at banking institutions to verify implementation of the Risk-Based Credit Pricing Model (RBCPM), and warned of severe penalties including fines amounting to three times the banks’ extra gains for those failing to reduce lending rates sufficiently.
Some lenders responded swiftly: KCB Bank cut its rates from 15.6 percent to 14.6 percent and Co‑operative Bank trimmed rates to 14.5 percent in early February 2025. Senior bank executives emphasized that compliance is complex since maturity of older high‑cost deposits slowed full transmission of policy rate cuts.
Kenya Bankers Association has pledged ongoing rate reductions and urged banks to adapt pricing models to reflect the new monetary stance.
Market analysts warn that the cost of loans may only fall further if non-performing loans (NPLs) decline. Banks are currently grappling with record NPL levels, which stood at Sh700 billion (17.2 percent of gross loans) in February 2025. High default risk places pressure on lenders to maintain rate premia, which could slow the pace of reductions.
The policy pivot reflects CBK’s recognition that credit stagnation private sector lending contracted by about 1.4 percent to December 2024 threatened broader economic recovery.
The central bank projects GDP growth of around 5.4 percent in 2025, contingent on revived credit flows and private sector activity.
For consumers and businesses, the U‑turn offers hope of gradual relief. Borrowers previously shouldering annual rates of 20‑plus percent may see rates approach the mid‑teens or lower, contingent on institutional compliance. Yet much depends on how quickly banks adapt risk models and how effectively CBK enforces its directives.
In summary, CBK’s policy reversal marked by successive rate and liquidity ratio cuts is designed to lower the cost of loans in Kenya. Its success now hinges on credible enforcement, adaptive bank pricing strategies, and resolution of systemic challenges such as high NPLs and deposit cost inertia.
Written By Ian Maleve
