Why CBK has lowered base lending rate to 9.25 per cent

CBK Governor Kamau Thugge.

The Central Bank of Kenya has cut its base lending rate by 25 basis points to 9.25 per cent, down from 9.50 per cent, in a move aimed at stimulating private sector lending and supporting economic activity.

When CBK cuts the rate, banks tend to lower their base lending rates (BLRs) and loan interest rates for businesses and households, making borrowing cheaper.

The Monetary Policy Committee (MPC), which met on October 7, said the decision followed a careful review of domestic and global developments.

For starters, the MPC pointed to the resilience of the Kenyan economy as a key factor behind its confidence in easing the policy stance, noting that inflation remained well within target and that the economy had shown strong resilience against external shocks.

Recent GDP data showed that the economy grew by 5.0 per cent in the second quarter of 2025, compared to 4.6 per cent in the same period last year, driven by strong performance in transport, finance, ICT and retail trade.

The agriculture sector also remained stable, supported by favourable weather and improved production.

Going forward, the committee observed that economic growth is projected to accelerate to 5.2 per cent in 2025 and 5.5 per cent in 2026.

Market sentiments also remained upbeat, with findings from the September CEOs and Market Perceptions surveys revealing sustained optimism over business activity in the coming year, citing a stable macroeconomic environment, low inflation and a resilient tourism and digital economy.

“Having considered these developments, the committee concluded that there was scope for a further easing of the monetary policy stance by reducing the Central Bank Rate by 25 basis points,” MPC chair Kamau Thugge said in a statement.

“This will augment previous policy actions aimed at stimulating lending by banks to the private sector and supporting economic activity, while ensuring inflationary expectations remain firmly anchored, and the exchange rate remains stable.”

Thugge said the MPC will closely monitor the impact of the policy stance and developments in the global and domestic economy and stands ready to take further action where necessary when it next meets in December 2025.

The committee said earlier interventions had anchored inflation expectations and stabilised the exchange rate, with overall inflation standing at 4.6 per cent in September, below the mid-point of the CBK’s 5 ±2.5 per cent target range.

The committee attributed this to stable energy prices, lower food inflation and continued exchange rate stability.

At the same time, it said the banking sector remains liquid and well-capitalised, with lending to the private sector rising steadily as interest rates decline.

Nonetheless, respondents to the CEOs and Market Perceptions surveys expressed caution over subdued consumer demand, high operating costs and persistent global uncertainties linked to higher tariffs and geopolitical tensions.

Kenya’s external position continues to strengthen, supported by robust export performance and resilient diaspora remittances, MPC said.

It said the current account deficit widened slightly to 2.1 per cent of GDP in the 12 months to August 2025, from 1.6 per cent a year earlier, reflecting higher imports of intermediate and capital goods.

However, goods exports grew by 3.6 per cent, led by horticulture, coffee, manufactured goods, and apparel.

Remittances and travel service receipts also posted strong growth, while the deficit is expected to narrow to 1.7 per cent of GDP in 2025.

CBK’s foreign exchange reserves currently stand at $10.8 billion (Sh1.393 trillion), equivalent to 4.72 months of import cover, providing a solid buffer against short-term domestic and external shocks.

MPC said the banking sector’s non-performing loans ratio also eased to 17.1 per cent in September from 17.6 per cent in June, with notable improvements in real estate, tourism, construction, and trade.

The committee noted that implementation of the government’s fiscal consolidation under the 2025-26 Budget is helping to reduce debt vulnerabilities, complementing monetary policy efforts to stabilise the economy.

Additionally, the forthcoming risk-based credit pricing model—expected to be fully operational by March 2026—is anticipated to improve the transmission of monetary policy and enhance transparency in loan pricing.