CBK Rate Cuts: Economic Impacts and Sectoral Outlook

Executive Summary

The CBK cut interest rates six times to 9.75% by June 2025, aiming to boost credit access and economic growth and maintain low inflation (3.8%). Falling lending rates are expected to stimulate key sectors, though success depends on how quickly banks transmit the cuts and address structural issues like high debt and non-performing loans.

Introduction and Background

CBK’s rate cuts, driven by domestic and global challenges, lowered interest rates significantly from January to May 2025. This accommodative policy seeks to enhance liquidity and support sectors like SMEs, housing, and manufacturing, while addressing risks to sustainable growth

Data and Analysis

COMMERCIAL BANKS' WEIGHTED AVERAGE INTEREST RATES (%)

CENTRAL BANK RATES

Between January and May 2025, the Central Bank Rate dropped from 11.25% to 10%, while commercial lending rates fell from 16.64% to 15.44%. Deposit and savings rates also declined, reducing returns on savings and encouraging spending. Falling T-bill rates reflect a shifting investor preference toward private sector lending. These trends highlight CBK’s accommodative stance to boost borrowing and investment, though their success relies on banks effectively passing on lower rates to businesses and households.

Key Findings

Sectoral and Economy-Wide Impacts

• Banking & Credit Access: Lending rates have declined gradually, encouraging modest growth in private sector credit (approximately 2% by May). However, banks remain cautious due to Non-Performing Loans (NPL) risks and legacy deposit costs.
• Manufacturing & Agriculture: Easier access to credit supports investment in equipment and production inputs, which can boost productivity and sectoral output.
• Real Estate & Construction: Mortgage costs are declining, enhancing homebuyer access and spurring potential real estate development, despite the drag from high NPL ratios (~17%).
• Consumer Spending: Lower loan costs and reduced mortgage payments leave consumers with more disposable income, likely boosting retail and durable goods sectors.
• Export Competitiveness: A modest depreciation in the Kenyan shilling due to rate cuts enhances export value, particularly in tea, horticulture and fish, helping narrow the current account deficit.
• Macroeconomic Stability: Inflation remains subdued at 3.8%, well below the CBK’s ceiling of 7.5%, creating space for further easing if needed.

– Risks: Structural issues—including fiscal deficit, global economic shocks and banking sector inefficiencies—could slow the impact of lower rates on broad economic activity.

Recommendations

1. Enhance Monetary Policy Transmission: CBK should continue engaging banks to ensure lending rate reductions are passed to borrowers, especially SMEs.
2. Monitor Inflation and Exchange Rates: While inflation is currently contained, CBK should remain alert to imported inflation risks as global prices shift.
3. Support for Priority Sectors: Introduce tailored credit support programs for agriculture, manufacturing and affordable housing to magnify the benefits of lower rates.
4. Strengthen Fiscal-Monetary Coordination: Complement rate cuts with fiscal policies that address delays in public payments and reduce debt vulnerabilities.
5. Address NPLs Strategically: Encourage restructuring and targeted guarantees to improve loan performance and free banks to lend more confidently.

References

• Commercial banks and Central Bank interest Rates
• Banks move to lower lending rates amid central bank rate cuts
• What the CBK Rate Cut Means for Kenya’s Real Estate Market in 2025
• Impact of Interest Rates Capping on The Kenyan Economy
• Kenya central bank cuts key rate again but by smaller margin
• CBK pushes for lower loan costs in sixth rate cut
• Economy of Kenya