Was The Decision By The Monetary Policy Committee A Balancing Act Or A Misstep?

The Monetary Policy Committee (MPC) of the Central Bank of Kenya (CBK) convened on February 5, 2025, in a climate of cautious optimism, economic strain, and shifting global dynamics. The key takeaways from this meeting reveal both promise and peril for Kenya’s financial and economic landscape. The committee’s decision to lower the Central Bank Rate (CBR) by 50 basis points to 10.75 percent and reduce the Cash Reserve Ratio (CRR) by 100 basis points to 3.25 percent is aimed at stimulating credit growth and economic activity. But is this the right approach, and will it yield the intended outcomes?

The rationale behind the decision hinges on several macroeconomic indicators. Inflation, at 3.3 percent, remains within the target range, with core inflation even lower at 2.0 percent. A stable exchange rate, lower energy costs, and moderating global inflation trends provide room for a more accommodative monetary policy stance. However, the Kenyan economy’s performance in 2024 was sluggish, with real GDP growth slowing to 4.6 percent from 5.6 percent in 2023. The MPC’s decision reflects a strategic push to rekindle economic dynamism in 2025.

One of the primary motivations for the easing of monetary policy is the contraction in private sector credit growth. The decline of 1.4 percent in commercial bank lending, particularly in foreign currency-denominated loans, signals reduced credit access due to high lending rates. By lowering the CRR, the CBK aims to inject liquidity into the banking sector, theoretically lowering lending rates and increasing credit availability to businesses and households.

However, a major concern remains: will banks translate this liquidity boost into cheaper loans for borrowers? The MPC itself noted that despite previous rate cuts, lending rates have not fallen significantly. Banks, citing risk concerns and past loan defaults, have remained hesitant in passing on rate reductions to consumers. To counteract this reluctance, CBK has launched on-site inspections to ensure compliance with the Risk-Based Credit Pricing Model (RBCPM), threatening penalties for non-compliance.

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From a consumer’s perspective, this move presents both opportunities and risks. Lower borrowing costs should, in theory, stimulate business investment and household spending. Entrepreneurs and SMEs, who have struggled with expensive credit, stand to benefit the most. Increased access to affordable loans could catalyze growth, create jobs, and improve overall economic resilience.

Conversely, the effectiveness of these measures hinges on commercial banks’ willingness to lend and the broader economic conditions. If banks remain cautious, fearing high default rates and economic uncertainty, the impact of these monetary policy adjustments may be muted. Further, with a significant portion of loans still denominated in foreign currency, exchange rate volatility remains a key risk.

Another critical dimension to consider is the broader global economic environment. While global growth is projected to improve in 2025, risks such as trade uncertainties, geopolitical tensions, and fluctuations in commodity prices persist. Kenya’s heavy reliance on agricultural exports, tourism, and remittances means that external shocks can quickly erode economic gains, limiting the effectiveness of domestic monetary policies.

The MPC’s decision also has implications for the fiscal policy landscape. The government’s fiscal consolidation strategy, aimed at reducing the budget deficit to 4.3 percent of GDP, relies on increased revenue collection and prudent spending. By lowering interest rates, the CBK indirectly supports this fiscal strategy, potentially reducing the government’s borrowing costs. However, if inflationary pressures resurface due to excessive liquidity, this could complicate efforts to maintain macroeconomic stability.

A potential downside to the policy shift is the impact on savers. Lower interest rates may discourage savings, leading to capital flight as investors seek higher yields elsewhere. This could pressure the foreign exchange reserves, which currently stand at USD 9.07 billion. A weakened shilling, in turn, could drive up import costs, particularly for essential commodities such as fuel and food.

On the other hand, an increase in credit uptake could spur economic expansion, drive employment, and enhance domestic consumption. Sectors such as real estate, manufacturing, and trade stand to gain, provided that banks extend loans to productive ventures rather than speculative activities.

For the ordinary Kenyan, the impact of these decisions will largely depend on how commercial banks respond. If banks genuinely lower lending rates, access to credit will improve, enhancing financial inclusion. However, if banks remain risk-averse and maintain high interest spreads, the expected benefits will not materialize, rendering the MPC’s efforts ineffective.

Moreover, the success of this strategy requires a supportive regulatory framework. The CBK’s commitment to penalizing banks that fail to adjust lending rates is commendable, but enforcement will be crucial. Without strict oversight, financial institutions may find loopholes to maintain their profit margins while keeping lending rates elevated.

Another consideration is the banking sector’s overall health. While the sector remains stable and well-capitalized, non-performing loans (NPLs) remain a persistent issue, currently at 16.4 percent of gross loans. If credit expansion leads to a further rise in NPLs, banks may tighten lending criteria, counteracting the intended stimulus effect.

The MPC’s approach is a delicate balancing act between stimulating economic growth and maintaining financial stability. The risk of inflation resurgence, exchange rate depreciation, and banking sector rigidity all pose significant challenges. Nevertheless, the policy shift aligns with global trends, where central banks in major economies are also easing monetary conditions to spur growth.

Kenya’s economic trajectory in 2025 will depend not only on monetary policy but also on structural reforms, governance, and external economic conditions. Encouraging banks to lend more aggressively must be complemented by initiatives that enhance financial literacy, reduce bureaucratic barriers to credit access, and promote investment in productive sectors.

Ultimately, while the MPC’s decision is well-intentioned, its success will depend on execution and market response. If properly implemented, it could serve as a catalyst for economic recovery. However, if banks resist rate reductions or if inflationary pressures re-emerge, the intended benefits may be eroded, leaving consumers and businesses in a precarious position.

Therefore, the MPC’s move is a step in the right direction, but its effectiveness is not guaranteed. For the average Kenyan, the real test will be whether borrowing costs genuinely decline and whether businesses gain easier access to credit. If banks comply and credit growth resumes, the decision could mark a turning point for the economy. If not, the move may end up being yet another policy adjustment with little real impact on the ground. Vigilant monitoring, strong enforcement, and complementary policy measures will be key to ensuring that this monetary policy shift translates into tangible benefits for all Kenyans.

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