Kenya slashes interest rates to near three-year low as inflation cools

Kenya's central bank has reduced its benchmark interest rate to the lowest level since early 2022, responding to an unexpected slowdown in inflation last month.

Governor Kamau Thugge announced Tuesday that the monetary policy committee cut the rate to 9% from 9.25%, aligning with predictions from economists surveyed by Bloomberg. The decision marks the latest step in Kenya's ongoing effort to stimulate economic growth through cheaper borrowing.

"This move will augment the previous policy actions aimed at stimulating lending by banks to the private sector and supporting economic activity," Thugge explained in an emailed statement.

The rate cut comes as Kenya continues to experience favorable inflation trends. Both headline and core inflation declined in November, falling to 4.5% and 2.3% respectively—down from 4.6% and 2.7% the previous month. Inflation has remained below the central bank's 5% target midpoint since mid-2024, providing policymakers with room to ease monetary conditions.

This reduction represents a significant shift in Kenya's monetary policy stance. Since beginning its easing cycle in August of last year, the central bank has lowered interest rates by a cumulative 400 basis points—a substantial move aimed at making credit more accessible to businesses and consumers.

The decision places Kenya among a growing number of African nations pursuing accommodative monetary policies. South Africa, Ghana, Zambia, and Lesotho have all recently reduced their borrowing costs as inflationary pressures ease across the continent.

Lower interest rates typically encourage banks to lend more freely to businesses and individuals, potentially spurring investment, consumption, and overall economic expansion. For Kenyan borrowers, the cuts should translate into reduced costs for mortgages, business loans, and other forms of credit.

The central bank's willingness to continue cutting rates signals confidence in Kenya's inflation outlook and suggests policymakers believe the economy needs additional support to reach its growth potential. However, the gradual approach—with a modest 25-basis-point reduction—indicates authorities remain cautious about moving too aggressively.

As Kenya navigates its economic recovery, the central bank appears committed to balancing the need for growth stimulus against the imperative of maintaining price stability.