Kenya’s central bank on Tuesday cut its benchmark lending rate by 25 basis points to 8.75%, brushing aside calls from commercial lenders to hold rates steady as food-related inflation risks mount.
The decision marks the 10th consecutive reduction since the easing cycle began in 2024 and brings the Central Bank Rate (CBR) to its lowest level since January 2023.
The Monetary Policy Committee (MPC) said the cut was aimed at reinforcing credit growth and strengthening monetary policy transmission, noting that inflation remains well within its 2.5% to 7.5% target band.
Ahead of the meeting, the Kenya Bankers Association (KBA) had urged the central bank to maintain the policy rate at 9%, arguing that a pause would allow for a smoother transition to the newly introduced risk-based pricing framework, which is set to take full effect by March.
The lobby group also warned of rising upside risks to inflation, pointing to volatile food prices linked to a prolonged dry spell that has disrupted agricultural output across key food-producing regions.
Kenya is currently contending with severe food shortages following the shortest October–December rainfall season since 1981.
Even so, inflation data suggest price pressures remain contained. Headline inflation eased to 4.4% in January from 4.5% in December, marking its slowest reading since August 2025.
CBK plays down inflation threat
Despite the warnings, the Central Bank of Kenya (CBK) said inflation is expected to remain stable in the near term, supported by a firm shilling, easing energy costs and improved weather conditions ahead.
“Respondents to the January 2026 Agriculture Sector Survey expect stable pump prices, exchange rate stability, and favourable weather conditions with the expected onset of the long rains, to support a stable inflation rate in the near term,” the bank said in a statement following the MPC meeting.
The CBK maintained that its latest decision will support previous policy actions targeted at stimulating bank lending and boosting economic activity, while keeping inflationary pressures anchored.
Tweaking the toolkit to boost transmission
Alongside the rate cut, the MPC moved to fine-tune its policy framework to strengthen transmission to money markets. The committee approved a narrowing of the interest rate corridor around the CBR to ±50 basis points from ±75 basis points.
In line with this adjustment, the applicable rate at the Discount Window was also reduced to 50 basis points above the CBR, aligning it with the upper bound of the corridor. The CBK said the changes would help anchor short-term interbank rates, particularly the Kenya Shilling Overnight Interbank Average (KESONIA), more closely to the policy rate.
Credit growth gathers pace
The easing cycle appears to be feeding through to lending conditions. Growth in commercial banks’ credit to the private sector rose to 6.4% in January 2026, up from 5.9% in December and a contraction of 2.9% a year earlier.
Credit expansion remained strongest in building and construction, trade and consumer durables, reflecting improved demand as borrowing costs declined. Average commercial lending rates fell to 14.8% in January, from 15.0% in October and 17.2% in November 2024.
Kenya bucks regional trend
Kenya’s decision to cut rates contrasts with a more cautious stance elsewhere in the region. Uganda’s central bank on Monday held its policy rate at 9.75%, where it has remained since October 2024, citing the need to support growth while keeping inflation anchored around its 5% medium-term target.
Tanzania’s central bank also kept its benchmark rate unchanged at 5.75% for a second consecutive meeting last month, saying stable inflation within its 3%–5% target range gave it room to prioritise growth.
By contrast, Kenya’s central bank is moving ahead with easing, betting that subdued inflation and improving credit conditions outweigh near-term food risks — a stance that underscores its confidence that price stability will hold, even as weather shocks test the outlook.
