The Monetary Policy Committee (MPC) of the Central Bank of Kenya (CBK) has announced a strategic reduction in the Central Bank Rate (CBR) by 50 basis points, bringing it down to 10.75% from 11.25%. This decision, made during the MPC meeting on February 5, 2025, is designed to stimulate economic growth while ensuring exchange rate stability and managing inflationary expectations.
The MPC also lowered the Cash Reserve Ratio (CRR) by 100 basis points, reducing it from 4.25% to 3.25%. This move is expected to inject additional liquidity into the banking system, making credit more accessible to the private sector.
Global Economic Context
The decision to adjust rates comes at a time when global growth prospects are improving, with expectations to reach 3.3% in 2025, a slight increase from 3.2% in 2024. Key contributors to this growth include the robust performances of the United States, India, and the United Kingdom. However, global risks remain, such as uncertainties in trade policy, ongoing geopolitical tensions (especially in the Middle East and Ukraine), and a slow decline in core inflation across major economies.
Domestic Economic Overview
In Kenya, overall inflation stood at 3.3% in January 2025, slightly up from 3.0% in December 2024, but still within the target range of 5±2.5%. Core inflation, which excludes volatile items, decreased to 2.0% from 2.2% in December, while non-core inflation rose to 7.1%, driven by higher food prices.
Kenya’s economic growth slowed to 4.0% in the third quarter of 2024, with an annual estimate of 4.6% compared to 5.6% in 2023. However, growth is projected to rebound to 5.4% in 2025, with various surveys indicating cautious optimism. Factors such as stable macroeconomic conditions and favorable weather have been cited, though challenges like subdued consumer demand and high business costs persist.
Banking Sector and Policy Measures
Despite the CBR reductions since August 2024, the MPC expressed concern that lending rates have only decreased marginally. The new reduction in the CRR is intended to lower the cost of funds further, encouraging banks to reduce their lending rates and stimulate credit growth.
The CBK has also intensified its efforts to monitor the banking sector, conducting on-site inspections to ensure banks comply with the Risk-Based Credit Pricing Model (RBCPM). Banks failing to pass on the benefits of lower funding costs will face penalties.
Conclusion
As Dr. Kamau Thugge, Governor of the Central Bank of Kenya, emphasized, the MPC is committed to monitoring the impact of these measures and will continue to adjust policy as necessary to foster economic growth. The next MPC meeting is scheduled for April 2025.
