CBK Signals Cautious Monetary Easing

The Central Bank of Kenya (CBK) trimmed its benchmark lending rate by 25 basis points to 9.25 percent in early October 2025, signalling a modest turn toward growth support as inflation drifted deeper into the 2.5–7.5 percent target corridor. Headline CPI eased to 4.6 percent in September from 5.2 percent in July, driven by softening food and transport prices and a firm currency relative to early-year levels.

Governor Kamau Thugge said the cut reflected “a data-driven calibration rather than a policy reversal.” Real yields remain positive, and the bank expects inflation to average 4.8 percent through Q1 2026, supported by stable fuel prices and moderating global commodities. However, the move introduces a delicate trade-off: loosening too early could weaken the shilling and invite renewed outflows just as the IMF reviews the country’s external-financing programme.

Money-market reaction was restrained. One-month T-bill yields slipped 17 bps to 13.21 percent, while the 10-year bond (KE10Y) compressed by 22 bps. Equity traders welcomed the signal, lifting the NSE All-Share Index (NSEASI) 1.6 percent week-on-week, but FX desks reported heavier importer demand near KSh 147/USD. Reserves stood at US $7.4 billion—about 4.1 months of import cover—leaving little margin for aggressive intervention if external flows turn volatile.

The CBK’s easing bias stems from weaker domestic credit growth, which slowed to 8.7 percent y/y in August from 10.2 percent a quarter earlier. Manufacturing and construction loans remain subdued, while agriculture credit contracted amid erratic weather. The government’s fiscal stance, meanwhile, remains tight; the Treasury aims to cut the overall deficit to 4.3 percent of GDP in FY 2025/26. Officials hope that lower rates will revive private investment without derailing consolidation.

Comparative dynamics illustrate the regional context. Uganda’s policy rate is steady at 9.5 percent with a stronger currency; Tanzania’s is unchanged but uses FX sales to manage liquidity. Kenya’s gentle easing therefore narrows the real-yield differential, potentially encouraging modest capital rotation. Whether this proves sustainable depends on Brent oil (BZ=F) and the US Dollar Index (DXY): a firm DXY or rising oil would compress policy space quickly.

For investors, Kenya’s shift is tactical, not structural. Analysts expect no more than 50 bps additional cuts by mid-2026 unless GDP growth undershoots the 5.5 percent forecast. The central bank must now balance credibility with stimulus—a fine line in a region where policy mistakes are swiftly punished by FX markets.