Bankers have urged the Central Bank of Kenya (CBK) to cut interest rates further to stimulate private sector credit growth and economic activity, ahead of the CBK’s Monetary Policy Committee’s next meeting on February 5th.
- •The Kenya Bankers Association (KBA) argues that a further decline in rates would stimulate credit growth while resolving credit market challenges including pending bills.
- •According to the lobby group, the elevated non-performing loans ratio has dampened the pace at which banks are cutting rates on loans.
- •23 commercial banks adjusted their lending rates downwards in December following CBK’s progressive cuts in 2024, lowering the average lending rate slightly from 17.22% to 16.89%.
“In view of these developments, and the growing need to reverse the deceleration in private sector credit, we call for a further cut in the Central Bank Rate to provide additional impetus to the ongoing downward adjustments in the commercial banks’ lending rates,” KBA said in a research note published on Wednesday.
The banking lobby group expects the monetary easing stance to be underpinned by the easing inflation anchored within CBK’s target bands, the shilling’s stability and slower economic growth.
“As lending rates remain elevated, credit growth remains muted. As such, there is a need to stimulate credit growth through a further cut in the CBR alongside other measures to support the ongoing risk-based credit pricing framework, and resolve credit market challenges such as the long-standing pending bills to forestall a further escalation of NPLs,” KBA added.
Lending to the private sector shrank 1.1% in the 12 months to November while the gross non-performing loans ratio decreased marginally to 16.5% in October from 16.7% in August.
In a commentary, Fitch Solutions forecast that the CBK will cut its benchmark rate by 300 basis points in 2025 to 8.25% “informed by the fact that policymakers remain concerned about high lending rates and poor credit growth – while low inflation will provide plenty of room to ease policy over the course of the year.”
Global Monetary Policy Trends
The Federal Reserve maintained interest rates at 4.25% – 4.50% in its January meeting with the Fed Chair Jerome Powell saying there would be no rush to cut them again until inflation and employment data justified it. In 2024, the Fed delivered 3 consecutive cuts in its benchmark rate with signals of fewer cuts in 2025.
While the Fed might not be the trend setters in the easing cycle, it still play a vital role in the direction setting. Central banks in Europe, England, Singapore, Canada and some emerging markets including Kenya had already started cutting their benchmark rates months before the Fed.
The European Central Bank (ECB) is expected to deliver a decision today with the markets pricing in another cut. In 2024, the ECB delivered 3 rate cuts owing to cooling inflation falling below the 2% target, and sluggish economic growth across the euro zone.
The Bank of Japan remains an outlier, delivering rate hikes owing to deflation that marked Japan’s economy for decades. Economies including Nigeria, Turkey and Brazil have also countered the easing trend with higher interest rates to tame inflationary pressures.
