- Sixth straight rate cut comes amid easing inflation, rising non-performing loans, and weak private sector credit growth.
- Kenya’s private sector credit grew by only 2% in May 2025, up from 0.4% in April and a contraction of -2.9% in January.
- Banking industry suffering loan defaults in trade, personal and household loans, tourism, and construction.
The Central Bank of Kenya (CBK) on Tuesday lowered its benchmark lending rate to 9.75 per cent, down from 10 per cent, in a bid to boost private sector borrowing and stimulate economic activity in an environment marked by weak growth and falling inflation.
This latest adjustment marks the sixth consecutive rate cut by the Monetary Policy Committee (MPC), reflecting an increasingly pro-growth policy stance by the banking industry regulator. According to the CBK, the policy decision is intended to support a sluggish economy weighed down by subdued demand, high cost of doing business, and global uncertainties, including the Trump tariffs.
“There was scope for a further easing of the monetary policy stance to augment the previous policy actions aimed at stimulating lending by banks to the private sector and supporting economic activity,” CBK Governor Dr. Kamau Thugge said in the bank’s post-meeting statement.
Private sector credit remains weak
Despite the series of cuts in the Central Bank Rate (CBR), private sector credit growth remains tepid. CBK data shows that commercial bank lending to the private sector grew by only 2 percent in May 2025, up from 0.4 percent in April and a contraction of -2.9 percent recorded in January.
The slow uptake of credit is partly due to heightened risk aversion by banks, which is mirrored in the rising tide of non-performing loans (NPLs) across key sectors. Between February and April 2025, CBK said the banking industry saw increased defaults by borrowers in trade, personal and household loans, tourism, and in the construction sector.
As of April, the ratio of NPLs to gross loans stood at 17.6 percent, underlining the financial strain in segments of the economy despite monetary loosening.
Lending rates continue to ease
Kenya’s average commercial lending rates have begun responding to the CBK’s easing cycle. The average interest rate dropped to 15.4 percent in May, from 15.7 percent in April and a much steeper 17.2 percent recorded in November 2024.
The MPC’s decision on Tuesday is aimed at reinforcing this downward trend in lending rates to encourage banks to lend more and businesses to borrow and invest. However, concerns remain over whether this easing will translate into meaningful economic momentum, given broader macroeconomic headwinds.
Inflation cools, but growth stalls
One of the central factors enabling the MPC to maintain its dovish stance has been the decline in inflation, which eased to 3.8 percent in May, well within the CBK’s target range of 5 ±2.5 percent. The softening in price pressures is largely attributed to stable food prices driven by favourable weather, easing fuel costs, and a relatively stable exchange rate.
However, while inflation has been tamed, economic growth has slowed sharply. According to the 2025 Economic Survey, Kenya’s GDP grew by 4.7 percent, down from 5.7 percent in the previous year. The report cited contractions across multiple sectors, including manufacturing, construction, and wholesale trade.
This year’s projections have also been revised downward. The economy is now expected to grow by 5.2 percent, down from an earlier forecast of 5.4 percent, amid the adverse effects of US trade tariffs and other global economic pressures.
CEOs flag rising uncertainty
In its pre-policy meeting survey, CBK polled over 1,000 business leaders and CEOs across various sectors. The sentiment was overwhelmingly cautious, with most respondents citing subdued consumer demand, high input costs, and global economic uncertainty as significant threats to business performance in the near term.
In agriculture, which forms a key pillar of Kenya’s economy, optimism persists that inflation will remain stable or decline further over the next three months. This outlook is supported by expectations of continued favourable weather, stable fuel prices, and foreign exchange stability.
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PMI falls back into contraction
Business conditions appear to be weakening further. The Purchasing Managers’ Index (PMI) for Kenya fell into negative territory in May, ending a seven-month run of expansion. The decline was attributed to rising input costs, which in turn led to weaker customer spending and reduced output.
While the downturn was relatively mild, it highlighted the fragile state of economic recovery, and reinforced the CBK’s case for further easing to shore up demand.
The CBK has indicated it will maintain a close watch on both domestic and global economic trends, as well as the transmission of its monetary decisions through the financial system.
“The MPC will closely monitor the impact of this policy decision as well as developments in the global and domestic economy and stands ready to take further action,” said Dr. Thugge.
