The Central Bank of Kenya (CBK) has cut its policy rate from 9.75 percent to 9.5 percent, piling pressure on commercial banks to lower their loan interest rates in order to stimulate private sector lending and growth of the economy.
This is the seventh consecutive cut in the Central Bank Rate (CBR), coming amid a slow recovery in private sector credit and a stubbornly high non-performing loans (NPL) loan ratio of 17.6 percent as of June 2025.
These cuts have now brought the base rate down by 3.5 percentage points over the last year, from 13 percent in August 2024.
The CBK said it hopes the additional rate cut will prod banks to reduce loan costs even as the industry awaits a new pricing regime that is expected to result in lower charges on loans for good borrowers.
“The committee concluded that there was scope for 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, while ensuring inflationary expectations remain firmly anchored, and the exchange rate remains stable,” CBK said in a statement on Tuesday after the MPC meeting.
The CBR now sits at its lowest level since May 2023, when CBK Governor Kamau Thugge took over from Dr Patrick Njoroge.
Dr Thugge raised the CBR to a 12-year high of 13 percent in February last year to stabilise both inflation and the exchange rate, before commencing the current easing cycle in August 2024.
Despite the actions signalling lower borrowing costs, interest rates on commercial bank loans have remained relatively high as lenders blame the current risk-based loan pricing formula for the expensive credit.
The overall weighted lending rates for the 38 licensed banks fell by a single percentage point between July last year and June 2025 as lenders largely defied steep cuts in the CBR, which have also helped lower their cost of funding significantly over the period.
The overall weighted average lending rate fell by 1.03 percentage points to 15.78 percent in June 2025 from 16.81 percent in July last year.
Meanwhile, the average fixed deposit rate dropped from 11.28 percent to 8.37 percent over the period, widening the lenders’ margins.
Rates for 10 of the 38 banks rose during the period, including Access Bank Kenya, Diamond Trust Bank (DTB), Co-operative Bank, Commercial International Bank (CIB), DIB Bank Kenya, and the Consolidated Bank of Kenya.
Only six commercial banks saw their weighted lending rates fall faster than the CBR over the period, including Citibank N.A. Kenya, Stanbic Bank Kenya, Standard Chartered Bank, Absa Bank, Victoria Commercial Bank, and Sidian Bank.
Through their lobby, the Kenya Bankers Association (KBA), banks have pointed out difficulties in bringing down interest rates under the current regime of pricing, calling for a uniform sector reference rate.
“Following the repeal of the interest capping law in November 2019 and the subsequent transition of the industry to risk-based credit pricing, banking industry engagements with the CBK have centred on the need to strengthen the transmission of monetary policy signals and enhance transparency in loan pricing,” KBA said previously.
The CBK is expected to shortly roll out a new industry benchmark for risk-based pricing, which has its floor on the interbank market, which dictates the cost of overnight borrowing between banks.
The CBK abandoned an earlier plan to base the new pricing regime on the CBR after successful lobbying by commercial banks.
KBA expects the new benchmark to enable the industry to quickly and uniformly translate the decisions of the monetary policy on borrowing costs.
“The new regime will have a uniform reference rate, which will be the interbank plus a competitive premium for each bank,” KBA chief executive officer Raimond Molenje told the Business Daily last week.
Meanwhile, private sector credit growth has remained subdued as the elevated interest rates lock out borrowers from the credit market, while high NPLs make banks reluctant to lend to riskier customers.
The CBK said that growth in credit to the private sector stood at 3.3 percent in July 2025 from 2.2 percent in June, albeit recovering from a contraction of 2.9 percent in January 2025.
The ratio of NPLs to total loan book, meanwhile, remained unchanged at 17.6 percent between April and June.
