In textbook economics, when central banks cut policy rates, the script usually plays out predictably. Lending becomes cheaper, spurring businesses to invest and households to spend. Indeed, the logic is reassuringly straightforward—at least in theory.
Yet, in Kenya a clear monetary policy easing cycle has sparked confusion rather than confidence. Something odd has been happening since mid-2024.
Since August 2024, as the Central Bank of Kenya has steadily cut its benchmark policy rate from 13 percent to 10.75 percent in February 2025.
Predictably, deposit rates, declined. Treasury bill rates, the benchmark for the government's borrowing and a key signal of the opportunity cost for bank lending, have also fallen sharply.
Simultaneously, interbank rates, indicative of liquidity conditions among banks, have swiftly plunged below the CBK’s own policy rate.
These conditions have been ideal for lower lending rates, yet borrowers have watched helplessly as lending rates not only resisted falling but perversely rose, peaking at 17.22 percent in November 2024, before easing to 15.77 percent in March 2025.
In addition, the differential between lending and deposit rates and has consistently widened.
In an attempt to address enhance credit pricing, nearly every policy experiment has been tried.
The Kenya Banks' Reference Rate (KBBR) tried in 2017 didn't work as anticipated; interest rate caps of 2016-2019 brought unintended consequences, choking credit flows rather than freeing them.
Then, gears shifted to risk-based pricing “1.0”, which seemed to work well when rates climbed upward but slowed as rates began to ease.
Now comes another well-intentioned experiment, risk-based pricing “2.0”: an industry base rate plus premium (“K”) which seems not to be in dispute in principle but for the dissonance of the parameters to gets into the framework.
Despite all these policy experiments to improve credit pricing, borrowers have yet to experience genuine relief. The asymmetric reaction to monetary policy is symptomatic of deeper structural issues; they reflect deeply entrenched incentives embedded within Kenya’s financial architecture.
Now is the time to ensure monetary policy isn't just articulated but effectively transmitted. We are at a critical moment where the market has not only to transmit policy signals upward during tightening but also downward when easing is necessary.
Therefore, as we tinker with these proposals on pricing reforms, we must remember that endless experimentation without meaningful reform risks turning monetary policy ineffective theatre, signalling good intentions but delivering little practical benefit to an economy hungry for affordable credit and this will not just undermine the economy’s prospects; it will also erode confidence in monetary policymaking itself.
The writer is acting Head of Research & Strategy at KMRC & PhD (Economics) Student – University of Nairobi.
