Introduction to Interest Rates
The Central Bank of Kenya (CBK) recently cut its benchmark interest rate by 25 basis points to 9.50 per cent. This move aims to stimulate economic activity and boost private sector credit growth, which has been sluggish.
The Response of Commercial Banks
Despite the CBK’s efforts to ease monetary policy, commercial banks have been slow to respond. They have been criticized for keeping lending rates elevated, stifling borrowing even as inflation stabilizes and the economy shows signs of resilience. The CBK Governor, Kamau Thugge, noted that there was scope for a further easing of the monetary policy stance.
Lending Rates and Economy
The economy has shown signs of resilience, with GDP growth of 4.9 per cent in the first quarter of 2025. The CBK projects full-year growth of 5.2 per cent. However, private sector credit growth remains far below the CBK’s ideal range of 12 to 15 per cent. The Market Perceptions Survey for July highlighted that "high lending rates" and "reduced business incomes" were key challenges in accessing finance.
Banks’ Cautious Approach
NCBA Group is among the few tier-one lenders that have publicly announced a reduction in base lending rates. The lender cut its Kenya shilling base rate to 13.52 per cent effective September 20 for variable-rate loans. However, other top-tier lenders are yet to communicate similar adjustments, reflecting a cautious approach despite pressure from regulators and businesses.
Barriers to Expansion
According to the CBK’s July 2025 CEOs Survey, firms continue to cite "constraints in business financing (inability to secure credit, cost of credit)" as a major barrier to expansion. The same report noted that while 69 per cent of firms reported a decline in bank lending rates, the reduction was "marginal at two per cent and below."
Asymmetric Transparency
Banks have often been accused of "asymmetric transparency" – quick to raise rates when the CBK tightens monetary policy but slow to pass on benefits when cuts are made. This has led to a lack of trust between borrowers and lenders.
Conclusion
In conclusion, the CBK’s decision to cut interest rates is a step in the right direction, but the slow response from commercial banks is a cause for concern. With the next MPC meeting scheduled for October, it remains to be seen whether commercial banks will broaden access to affordable credit and support the CBK’s efforts to revitalise the economy. The fate of private sector credit growth hangs in the balance, and only time will tell if lenders will take the necessary steps to stimulate economic activity.
