The Central Bank of Kenya’s Monetary Policy Committee (MPC) has made a significant decision to lower the Central Bank Rate (CBR) by 50 basis points, bringing it down to 10.75%. This marks the fourth consecutive cut in the rate. Additionally, the MPC has reduced the Cash Reserve Ratio (CRR) by 100 basis points to 3.25% during their meeting on February 5, 2025.
This decision means that borrowing costs for banks will decrease, as the CBR influences the interest rates that banks charge their customers. Lower interest rates can encourage borrowing and spending, which may stimulate economic growth. The reduction in the CRR also allows banks to keep less money in reserve, freeing up more funds for lending to businesses and consumers. Overall, these measures are aimed at supporting economic activity and promoting a more favorable environment for growth.
The MPC noted that although overall inflation has remained below the target and core inflation continues to decline, economic growth slowed down in 2024, which called for a more accommodative monetary policy. Consequently, these measures aim to boost economic growth while ensuring stability in the exchange rate.
In essence, by reducing the CBR and CRR, the MPC is trying to create a more favorable lending environment. This can lead to increased investment and consumer spending, which are crucial for reviving economic growth.
The Committee’s decision comes amid a recovering global economy, although uncertainties persist regarding trade tensions between major economies, such as the ongoing U.S.-China trade disputes, and geopolitical issues including conflicts in Eastern Europe and the Middle East. These factors contribute to economic instability.
Additionally, moderating but persistent inflation in advanced economies like the United States and the Eurozone remains a concern. While they recognized positive indicators such as a healthy current account balance and robust foreign exchange reserves, the MPC also pointed out the slowdown in economic growth.
They highlighted the necessity for banks to transfer the benefits of the CBR and CRR reductions to borrowers by lowering their lending rates. The MPC reiterated its commitment to closely monitor both domestic and global economic trends, indicating they are prepared to take further action if necessary.
Additionally, the Central Bank of Kenya (CBK768 21) is utilizing penalties outlined in the Business Laws (Amendment) Act 2024, which can be as high as three times the realized gains by banks, to ensure that banks extend the interest rate relief to borrowers. This approach aims to hold banks accountable and promote a more favorable lending environment for consumers and businesses.
The Central Bank Governor pointed out that five banks are currently undergoing an on-site inspection by the apex bank to verify that the cost of funds corresponds with the interest rates they charge.
Banks must ensure that their lending practices align with the monetary policy changes and that they effectively pass on the benefits of reduced rates to borrowers. The key takeaway for banks is to prioritize fair lending practices and compliance with regulatory expectations to foster a healthier financial environment.
