MUNYASYA: How CBK’s tenth rate cut impacts monetary easing in Kenya

On February 10, the Central Bank of Kenya made its tenth consecutive reduction to the Central Bank Rate, lowering it from 9.00 per cent to 8.75 per cent.

The reason behind the move, which has been supported by the Monetary Policy Committee, is to stimulate the issuance of credit to the private sector and to strengthen economic growth in a period, when inflation remains subdued within the CBK’s target band of 2.5-7.5 per cent. 

The central tenet of the decision is driven by monetary easing — a policy adopted when inflationary pressures are contained and economic growth objectives can be supported without jeopardising price stability. As the headline inflation figure stood at 4.4 per cent in January, much lower than the policy target, the Monetary Policy Committee concluded it will be possible to work on the cost of borrowing and keep the macroeconomic environment steady.

The downward adjustment in the interest rate corridor further tightens the link between the policy rate and interbank market conditions, intended to strengthen the transmission mechanism of monetary policy.

Hypothetically, when a policy rate is decreased, the banks are supposed to obtain money at a cheaper price, and this should be reflected in the commercial lending rate, according to the standard macroeconomic theory. Cheaper credit reduces the hurdle rate for businesses and households, encouraging investment and consumption — key drivers of aggregate demand.

The current credit growth pattern at an estimated rate of approximately 6.4 per cent per annum in January 2026, indicates a low but consistent rise in borrowing by the private sector, which implies that low borrowing rates are starting to favour borrowing activities.

It is important to emphasise that lower lending rates do not directly increase disposable income. A decline in the Central Bank Rate does not imply that people will just have more money in their pockets.

Rather, it decreases the cost of borrowing or, in other words, amidst those who opt to borrow credit, the cost of prices charged to borrowing becomes lower. As it may have an indirect stimulatory effect on the economy, it is not comparable to a fiscal transfer or wage increase. The general awareness of this difference is vital in managing expectations of the policy results.

In a monetary economics viewpoint, the reduction of the policy rate would normally lead to the clench of more liquidity in the economy, through the attraction of credit.

This subsequently has the potential of triggering aggregate demand since consumers and businesses take loans to invest and consume the product.

A free flow of credit increases the rate at which money circulates in the economy. When this surge in demand surpasses the productive ability of the economy, it mayproduce upward price pressure, which may become a source of inflationary pressures in the medium run.

The lower interest rate environment also has implications for capital flows and the exchange rate. With lower yields on fixed-income instruments, investors may seek higher returns elsewhere, potentially exerting pressure on the Kenyan shilling. However, in the current context of stable inflation and reasonable foreign exchange reserves, major currency destabilisation risks are considered manageable.

Furthermore, while cheaper credit can support growth, it must be paired with structural reforms that enhance the transmission of policy to lending outcomes. Historical evidence shows that Kenyan banks have been slow to pass through benchmark rate cuts to customers due to risk-based pricing practices.

Enhancements such as the Risk-Based Credit Pricing Model, scheduled for full implementation by March 2026, are expected to improve transparency and make policy transmission more effective.

The CBK’s tenth consecutive benchmark rate cut reflects an accommodative monetary policy calibrated to the prevailing macroeconomic conditions. Although it may bring down the borrowing costs and may even trigger economic activity, it must be realised as an access to cheaper credit, not a direct boost to the household income.

Timing is of the essence. Policymakers and the rest of the population should ensure that they balance between boosting demand and maintaining price stability in order to keep the economy healthy in the long run.

The writer is an economist and business consultant, j[email protected]