The Central Bank of Kenya (CBK) reduced its benchmark interest rate by 25 basis points to 8.75% on Tuesday, February 10, 2026, marking an unprecedented 10th consecutive rate reduction that brings borrowing costs to their lowest level since January 2023. The Monetary Policy Committee’s (MPC) decision extends the longest easing cycle in the region and reflects sustained confidence in Kenya’s inflation trajectory, strengthening external buffers, and the central bank’s determination to stimulate private sector credit growth without compromising price stability.
Governor Kamau Thugge emphasized that the rate reduction “will augment the previous policy actions aimed at stimulating lending by banks to the private sector and supporting economic activity,” adding that “the cut will also ensure inflation expectations stay firmly anchored, and the exchange rate remains stable.”
Sustained Inflation Moderation Provides Policy Space
Kenya’s annual inflation rate eased to 4.4% in January 2026 from 4.5% in December 2025, marking the 31tst consecutive month that the country has maintained price stability within the Central Bank’s target band of 2.5% to 7.5%. More significantly, inflation has remained below the 5% midpoint.
The CBK projects that inflation will remain below the midpoint of the target range in the near term, supported by lower prices of processed food items, stable energy costs, and continued exchange rate stability. This benign inflation outlook has been instrumental in providing the central bank with confidence to maintain its aggressive easing stance.
Non-core inflation fell to 10.3 per cent from 11.2 per cent, mainly due to lower prices of key vegetables such as tomatoes and onions. Core inflation rose slightly to 2.2 per cent from 2.0 per cent, reflecting modest increases in prices of some processed foods, including maize flour.
Credit Conditions Gradually Improving
One of the primary objectives of the CBK’s aggressive easing cycle has been to stimulate private sector lending, which had contracted significantly during the period of tight monetary policy. Private-sector credit growth improved to 6.4% in January 2026, up from 5.9% in December 2025, as lower lending rates gradually feed through the financial system.
This improvement in credit growth represents a substantial recovery from the contraction of -2.9% recorded in January 2025, when businesses and households were still reeling from the impact of elevated borrowing costs that prevailed through much of 2024. The modest but consistent acceleration in credit growth suggests that the monetary transmission mechanism is functioning, albeit with the typical lags between policy rate changes and lending behavior.
Average commercial bank lending rates have declined to 14.8% in January 2026 from 15.0% in December 2025, according to CBK data. This decline in actual lending rates charged to borrowers is critical for translating monetary policy easing into tangible economic stimulus, as businesses and consumers base their borrowing decisions on the rates they actually face rather than the policy rate itself.
The central bank has emphasized in the recent MPC communication that lower policy rates should “support a moderation in lending rates” and ease funding conditions for firms and households. The Risk-Based Credit Pricing Model, expected to be implemented by March 2026, is anticipated to enhance monetary policy transmission and improve loan-pricing transparency, potentially accelerating credit growth and economic activity by making lending decisions more responsive to individual borrower risk profiles rather than blanket risk assessments.
To further support lending, the MPC approved narrowing the interest rate corridor around the Central Bank Rate from 75 basis points to plus or minus 50 basis points. The discount window rate’s upper bound was also reduced from 75 to 50 basis points above the CBR.
“These measures are intended to align interbank rates closely with the CBR and make borrowing costs more predictable for businesses and households,” Thugge said.
Banking Sector Stability Underpins Policy Confidence
The MPC reported that Kenya’s banking sector remains stable, with comfortable liquidity buffers and healthy capital levels. This stability is essential for the effectiveness of monetary policy transmission, as banks serve as the primary channel through which policy rate changes affect the broader economy.
Banking sector liquidity remains adequate, with commercial banks maintaining substantial deposits at the central bank and in the interbank market. Capital adequacy ratios across the sector remain well above regulatory minimums, providing banks with capacity to expand lending as credit demand recovers. The gradual improvement in the NPL ratio from its recent peak, even though it remains elevated, suggests that asset quality pressures may be stabilizing.
The CBK’s assessment of banking sector stability reflects several factors: prudent regulatory oversight and supervision by the central bank, banks’ conservative approach to risk management in recent years, the positive impact of previous monetary tightening in controlling inflation and reducing macroeconomic volatility, and improving economic conditions that support borrower repayment capacity.
The stability of the banking sector is particularly important given Kenya’s bank-dominated financial system, where commercial banks account for the vast majority of financial intermediation. A healthy banking sector is prerequisite for translating monetary easing into increased credit availability for businesses and households.
" The banking sector remains stable, supported by strong liquidity and capital adequacy ratios. Non-performing loans declined to 15.5 per cent in January 2026 from 16.7 per cent in October 2025, reflecting improvements in the real estate, manufacturing, trade, and construction sectors. Credit growth to the private sector continued to improve, reaching 6.4 per cent in January 2026 from 5.9 per cent in December 2025. Average commercial bank lending rates fell to 14.8 per cent from 15.0 per cent, easing borrowing costs for businesses and consumers." said CBK.
Exchange Rate Stability as a Policy Anchor
A key consideration in the MPC’s decision-making has been the stability of the Kenyan shilling against major currencies, particularly the US dollar. Throughout 2025, the shilling remained relatively stable, trading around Ksh 129.20 per dollar, supported by strong foreign exchange inflows and the CBK’s adequate reserve buffers. The shilling is still at the same range in 2026.
This exchange rate stability is critical for several reasons. It anchors inflation expectations by ensuring that import prices remain predictable, reduces balance sheet risks for businesses and the government with foreign currency liabilities, supports investor confidence in Kenya as a destination for foreign investment, and enables the central bank to focus monetary policy on domestic objectives rather than defending the currency.
The MPC emphasized that the rate cut will ensure “the exchange rate remains stable,” reflecting the central bank’s confidence that continued monetary easing will not undermine currency stability given the strong external position. This confidence distinguishes Kenya from some regional peers where weak reserves and current account pressures constrain monetary policy options.
The MPC also reviewed fiscal developments and noted the ongoing implementation of the 2025/26 financial year government budget, alongside a fiscal consolidation strategy aimed at reducing medium-term debt vulnerabilities.
Longest Easing Cycle in East Africa
The tenth consecutive rate cuts delivered since mid-2024 mark the longest easing run in the region, distinguishing Kenya from its peers in East Africa and reflecting the central bank’s confidence in domestic macroeconomic stability. The benchmark rate has now fallen from a 12-year high of 13.0% in April 2024.
This consistent easing path began when the MPC shifted away from the tightening stance it had maintained through 2023 and early 2024, when inflationary pressures from elevated food and fuel costs, combined with exchange rate volatility, necessitated restrictive monetary policy. The turning point came in mid-2024 when inflation began moderating consistently, the shilling stabilized, and external buffers strengthened through successful debt refinancing operations.
Kenya’s approach contrasts with the more cautious stance adopted by some of its regional neighbors. While Ghana and Zambia have joined the easing trend, delivering rate cuts as price pressures eased and economic conditions stabilized, Nigeria and Uganda have kept rates unchanged, citing foreign exchange volatility, liquidity constraints, and slower disinflation. Against this backdrop, Kenya stands out not for the size of individual policy moves but for the consistency and duration of its easing cycle.
Global Economic Context and External Risks
The MPC’s assessment of the global economic environment acknowledges both supportive factors and risks. Globally, economic growth has remained resilient, with an estimated expansion of 3.3 per cent in 2025. The MPC cited strong consumer spending, improved financial conditions, and increased investment in artificial intelligence-led technologies, particularly in the United States, as key drivers.
The MPC identified several global risks that warrant monitoring: geopolitical tensions in the Middle East and Europe, which could disrupt energy supplies and trade routes; weaker international demand, which could impact Kenya’s export performance; commodity price volatility, particularly for oil and agricultural products; and tightening financial conditions in advanced economies, which could reduce capital flows to emerging markets including Kenya.
These external risks necessitate continued vigilance by the CBK and underscore the importance of maintaining adequate buffers, including foreign exchange reserves, to cushion against potential shocks.
Looking Ahead: Future Policy Direction
The CBK’s statement indicated that the committee “will closely monitor the impact of this policy decision as well as developments in the global and domestic economy and stands ready to take further action.” This language suggests that while the central bank is confident in the current easing path, it remains data-dependent and prepared to adjust policy in either direction as circumstances warrant.
However, several factors could constrain the pace or extent of further easing. A potential resurgence in global commodity prices, particularly oil, could reignite inflationary pressures. Renewed fiscal slippage or failure to meet consolidation targets could undermine confidence and put pressure on the exchange rate. Weaker-than-expected global growth could reduce remittances and export demand. Political instability or policy uncertainty could dampen business confidence despite supportive monetary conditions.
The MPC noted that the economy remains resilient. Real GDP grew by 4.9 per cent in the third quarter of 2025, supported by a rebound in the industrial sector and steady performance in services. Leading economic indicators point to improved activity in the fourth quarter. Overall economic growth for 2025 is estimated at 5.0 per cent, slightly below the earlier projection of 5.2 per cent, largely due to slower agricultural output.
The economy is expected to expand by 5.5 per cent in 2026 and 5.6 per cent in 2027, driven by continued strength in services, recovery in industry, and stable agricultural growth.
Thugge said the CBK will continue to closely monitor domestic and global developments and adjust policy if necessary. The MPC is scheduled to meet again in April 2026 to review developments and make further monetary policy decisions.
Implications for Businesses, Consumers, and Investors
The continued monetary easing has significant implications across the economy. For businesses, lower borrowing costs should gradually improve access to affordable credit for working capital and investment. Companies contemplating expansion projects may find financing more attractive, though they will need to weigh borrowing costs against demand prospects and other operating challenges.
For consumers, the rate cuts should eventually translate into lower rates on consumer loans, including mortgages, vehicle financing, and personal loans, though the transmission to retail lending rates typically lags policy changes. However, the benefits of lower rates must be weighed against elevated food prices and other cost-of-living pressures affecting household budgets.
For investors, Kenya’s monetary easing cycle and strengthened external position enhance its attractiveness relative to regional peers. The stable inflation environment, improving growth outlook, and supportive policy stance create a more predictable investment climate. However, investors must also consider ongoing debt sustainability concerns and structural challenges that could limit long-term growth potential.
For the banking sector, lower policy rates reduce net interest margins as lending rates decline, potentially pressuring profitability. However, increased loan volumes from accelerating credit growth could offset margin compression, and reduced NPLs as economic conditions improve would benefit asset quality.
