The Monetary Policy Committee (MPC) of the Central Bank of Kenya (CBK) elected to cut the Central Bank Rate (CBR) by 25 basis points to 9.25% from 9.50%, marking the 8th consecutive rate cut in the easing cycle since August 2024. The Committee argued that the action to cut rates was to strengthen prior policy actions directed at rejuvenating commercial bank lending to the private sector, supporting economic activity whilst anchoring inflation expectations and ensuring stability of the exchange rate.
Anchored Inflation Expectations
The MPC pointed out that inflation is expected to remain below the midpoint (5%) of the target range (5%±2.5%). Globally, headline inflation is on a downtrend with the projection showing the inflation rate declining to 4.2% in 2025 and 3.6% in 2026. The easing of inflation is on account of lower energy prices across the board. For Kenya, inflation expectations are largely anchored, and inflation is expected to remain below 5% on account of stability in energy prices. The risks to the inflation outlook include weather conditions, higher tariffs on trade, and worsening geopolitical tensions which could impact oil prices.
Banking Sector Lending Recovery
The MPC appreciated that there was improvement in commercial bank lending to the private sector with growth coming in at 5.0% in September 2025 as compared to 3.3% in August 2025 and a dip of 2.9% at the start of the year in January. The MPC attributed this turnaround to the easing of interest rates, noting that the average commercial bank lending rate had eased to 15.1% in September 2025 from 15.2% a month earlier and a peak of 17.2% in November 2024. The dropping of the commercial bank lending rate is in tandem with the cuts in the CBR and the resultant transmission of the general easing of interest rates in the economy.
“With that reduction in short-term rates, we’ve also seen commercial banks lending rates decline and they have declined from a peak of 17.2% in November 2024 and with the continued easing of monetary policy we’ve seen lending rates decline all the way to 15.1%. Similarly, the average deposit rates have declined as the cost of funding has reduced but the average deposit rate has declined at a faster pace.”
The Chairman of the MPC noted that there was hesitation by banks to cut interest rates in line with the easing of the CBR, which is inverse the trend that was registered when the MPC was in its tightening cycle.
“What we have observed is that banks were quick to raise rates as the CBR went up but weren’t as quick to lower their lending rates when rates came down. And therefore, this new framework where we have a common reference rate for all the banks and all variable rate loans which is the KESONIA, will automatically imply that every time we lower the policy rate, and undertake the monetary policy operations to lower the KESONIA to the new level of the policy rate that immediately the Kenyan borrowers from the banks will experience immediate reduction in their interest rate. That is the intention of this new policy framework.”
Easing Banking Sector NPLs
A notable development was that the gross non-performing loans ratio in the banking sector eased by 50 basis points to 17.1% in September 2025 from 17.6% in June 2025 and 16.4% in December 2024, marking the first decline in the NPL ratio after a consistent upward trend. The easing of the NPLs was registered in sectors including building and construction, real estate, tourism, restaurant and hotels as well as trade sectors.
Expected FX Reserves Growth
With the projection of the current account deficit at 1.7% of Gross Domestic Product (GDP) in 2025 and 1.8% of GDP in 2026, the expectation is for the account to be exceedingly funded by financial account inflows. According to the CBK MPC, this is expected to result in an overall surplus in the Balance of Payments (BOP) and USD 674M and USD 229M buildup in gross reserves in 2025 and 2026, respectively. As of 9th October 2023, the gross usable forex reserves amounted to USD 11.23B, equivalent to 4.9 months of import cover.
MPC On Liability Management Operations
Dr. Kamau Thugge pointed out that the decline of Kenya’s Eurobond yields since April 2025 gave the government an opportunity and window to go to the global markets and raise funding for refinancing the USD 1B Eurobond due 28th February 2028. The issuance, done in early October, was successful, with total investor bids coming in in excess of USD 7.3B out of an offer of USD 1.5B, which was 4X oversubscription.
“The Eurobond market, the yields have declined quite significantly since April, and specifically in the case of Kenya we can see quite significant reduction in the yields on our Eurobonds. This was the impetus for the government to do liability management in the last few days and we expect that transaction to be completed early next week and this involves the liability management of a Eurobond of USD 1B that will be falling due in early 2028 and so the liability management is supposed to deal with that and move the maturity date to either 7 or 12 years.”
Progress on the IMF Talks with Kenya
IMF staff led by Haimanot Teferra were in Kenya from September 25, 2025 to October 9, 2025 to assess the economy and discussing a potential funded program with Kenya authorities including President William Ruto, The Cabinet Secretary to the National Treasury Hon. John Mbadi, CBK Governor Dr. Kamau Thugge, and other stakeholders. The discussions are ongoing, and Kenya authorities will continue engaging with the IMF staff at the 2025 Annual Meetings of the International Monetary Fund (IMF) and the World Bank Group (WBG) that will take place from Monday, October 13 to Saturday, October 18, 2025 in Washington, D.C, USA.
“We have been having the IMF visit us for the last 2 weeks. We are continuing discussions with a view to having a program. The discussions will continue next week when we go to Washington and of course we will hope to reach agreement on a funded programme as soon as is possible.”
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