The Shilling’s Rollercoaster: Free Rides, But Who’s Driving?

The Momentum: What the Seventh Rate Cut Signals

In Kenya’s monetary policy drama, the Central Bank of Kenya (CBK) has now pulled off its seventh consecutive interest rate cut, trimming the Central Bank Rate (CBR) to 9.50%. If rate cuts were chapatis, the CBK would be running a buy-six-get-one-free promo. The move is being hailed in some corners as a sign of confidence, in others as a flashing yellow light on the economic dashboard.

To put this in perspective, Kenya hasn’t seen such a rapid-fire easing cycle in recent memory. In fact, this is arguably one of the most aggressive monetary loosening streaks in the country’s history. Globally, central banks usually cut rates in cautious half-steps, like a boda boda rider dodging potholes. The CBK, however, seems to be taking full swerves; cutting rates every meeting as though the economy is an overheating sufuria that must be taken off the stove immediately.

The backdrop? Inflation has been tamed, at least for now. From highs of over 9% in mid-2022, headline inflation eased to just 2.8% by the last quarter of 2024. This was thanks to favorable weather boosting food supply, a stable shilling curbing import costs, and global commodity prices calming down. Lower inflation gives the CBK “room to manoeuvre” — policy speak for “we can finally loosen our belts a bit.”

But here’s the big question: is this streak a sign that the CBK is confidently steering the economy toward growth, or is it a desperate attempt to revive a slowing engine? GDP growth had already softened to 4.8% in the first half of 2024, down from 5.5% in the same period in 2023. Industrial activity remains subdued, private sector credit growth has decelerated, and non-performing loans (NPLs) are stubbornly high at over 16%.

On one hand, cutting rates could stimulate borrowing, spending, and investment; the classic textbook response to sluggish growth. On the other, too much cutting too quickly could signal that the economy is more fragile than officials are letting on. If you’ve ever been on a matatu where the driver keeps pressing the horn at every small thing, you start wondering: is he in control, or is something ahead going wrong?

As it stands, Kenya’s monetary pivot is both a bold experiment and a high-stakes gamble. The CBK is betting that sustained cuts will light a fire under economic activity without stoking inflation again. Whether this bet pays off will depend on how well the policy translates from the clean lines of an MPC statement to the messy realities of Kenyan households, businesses, and, yes, that ever-volatile shilling.

Inflation vs Growth: Walking the Monetary Tightrope

If monetary policy was a circus act, the CBK right now is the tightrope walker, balancing between keeping inflation low and making sure the economy doesn’t doze off mid-performance. On paper, they’re doing a decent job. Inflation was ~4.1% in July 2024 and then cooled further to 2.8% by year’s end, comfortably inside the target band of 2.5–7.5%.

But here’s the tricky part: inflation this low isn’t always a sign of economic health. Sometimes it’s just the economy whispering instead of talking; demand is weak, people aren’t spending much, and businesses aren’t exactly raising prices because… well, customers are already complaining about the current ones. Think of it as when your landlord hasn’t raised rent in two years, you’re happy, but it also means the housing market isn’t exactly booming.

The CBK’s challenge is to keep inflation well-behaved while giving growth a caffeine boost. If they keep rates too low for too long and the economy heats up unexpectedly, say, from a surge in government spending or global commodity price spikes, inflation could stage a comeback. And in Kenya, price shocks often arrive uninvited, like a cousin showing up at your wedding reception without an invite and expecting to be served first.

There’s also the structural side to consider: food and energy prices make up a big chunk of Kenya’s inflation basket. They’re highly sensitive to weather patterns, global oil prices, and exchange rate swings. While good rains and a stronger shilling helped in 2024, it wouldn’t take much, a bad harvest, an oil supply disruption, to reverse the trend.

From the growth side, the CBK’s low-rate stance is clearly meant to encourage borrowing. But here’s the uncomfortable truth: policy rate cuts don’t always translate into cheaper loans fast enough. The Monetary Policy Committee’s own October 2024 report notes that spreads between the CBR and lending rates remain stubbornly wide. This means commercial banks, while happy to enjoy the lower cost of funds, aren’t exactly falling over themselves to pass the savings to borrowers.

For micro, small, and medium enterprises (MSMEs), the backbone of Kenya’s job market, credit remains elusive. Ask any shopkeeper in Gikomba or a boda operator in Kisumu, and you’ll hear the same refrain: “Benki bado wanataka collateral ni kama unaenda kukopa kujenga Mansion.” Translation: they still want the kind of collateral you’d need to build a Mansion.

So while the CBK has been busy lowering the cost of money at the top, the real economy is still playing a long game of wait-and-see. Until lending rates actually budge and MSMEs can access loans without selling their grandmother’s plot, the monetary easing might feel more like a theoretical exercise than a lived reality.

Transmission Mechanism: Are Lower Rates Reaching You?

Here’s the million-shilling question: when the CBK slashes rates, do you, the business owner in Thika, the farmer in Kitale, the Uber driver in Nairobi, actually feel it? Or does it get lost somewhere between the MPC meeting and your bank statement?

In theory, the transmission mechanism is straightforward: lower policy rates → cheaper bank funding costs → lower lending rates for you → more borrowing and spending → economic growth. In practice, in Kenya, it can feel more like a WhatsApp forward — the message is supposed to get to you quickly, but it’s delayed, altered, and sometimes never arrives.

The October 2024 MPC report makes it clear: while the interbank market has become more efficient since the new monetary policy framework was adopted, the pass-through to commercial lending rates has been slow. Part of the reason is that banks are still pricing in high credit risk, with non-performing loans at 16.4% by Q4 2024, they’re understandably cautious. Another part is that the competition in Kenya’s banking sector isn’t always fierce enough to pressure everyone to drop rates quickly.

For consumers and MSMEs, the story is even less rosy. Bank spreads, the gap between what they pay for funds and what they charge you, remain wide. Some borrowers report that even after multiple rate cuts, they’re still being quoted double-digit interest rates that make you wonder if the banker is lending you money or selling you a used car.

There’s also the collateral problem. A rate cut doesn’t change the fact that most banks will still ask for property titles, fixed deposits, or other hard security that many small businesses simply don’t have. As a result, a lot of MSMEs end up turning to shylocks and mobile loans, which completely defeats the purpose of monetary easing.

Meanwhile, big corporates and government-linked borrowers, who are already seen as low-risk, get to enjoy the cheaper money first. It’s like being at a buffet where the VIPs eat first, and by the time your turn comes, only ugali and sukuma wiki are left.

The CBK knows this and has been working on reforms to deepen the credit market, improve risk assessment, and encourage banks to lend more to productive sectors. But until these structural issues are fixed, the full impact of those seven consecutive cuts may stay locked in the banking system, trickling down far too slowly to spur the kind of grassroots growth Kenya needs.

Economic Signals: Impact on Growth, FX & Stability

Cutting rates is one thing; seeing how the economy reacts is another. And right now, Kenya’s macroeconomic dashboard looks like one of those old Toyota dashboards: some green lights, some red lights, and one or two flickering that you’re not sure about.

On the growth front, projections for 2024 remain modest. The World Bank’s June 2024 Kenya Economic Update pegs GDP growth at 5.0%, slightly down from 2023’s 5.6%. The slowdown reflects fading momentum from last year’s strong agricultural performance, cautious private investment, and a still-struggling industrial sector. Services, especially tourism, ICT, and finance, continue to carry the load, while construction and manufacturing are limping along like a matatu on its last shock absorber.

On the currency side, the shilling has been on a relative winning streak compared to its turbulent 2023. After a sharp depreciation early last year, reforms in the interbank FX market, resilient export earnings, and the Eurobond buyback in February 2024 helped stabilize the exchange rate. By late 2024, the CBK’s reserves were at USD 8.57 billion, or 4.41 months of import cover, giving policymakers a cushion against short-term shocks. Still, risks remain: geopolitical tensions in the Middle East and Red Sea shipping disruptions could push up import costs and test this stability.

The current account deficit, however, widened to USD 1.397 billion in Q4 2024 from USD 1.285 billion a year earlier, largely due to higher goods imports. This isn’t necessarily a disaster, increased imports can signal stronger demand, but it also means Kenya needs robust export performance to keep its external balance in check.

Financial stability remains intact for now. The banking sector is well-capitalized (capital adequacy at 19.4%, above the 14.5% minimum) and liquid, but profitability has slipped, and high NPLs are a persistent headache. For investors, Kenya’s combination of a stable shilling, decent reserves, and moderate inflation is a plus. But the big watchpoint is debt servicing: with public debt still climbing and external borrowing costs high, the fiscal space to absorb future shocks is limited.

In short, the monetary easing is sending mixed signals:

• Positive for FX stability, inflation, and market confidence.

• Cautious for growth momentum, as structural bottlenecks still weigh on industrial activity and credit flows.

• Risk-prone if external conditions (oil prices, shipping routes, global rates) suddenly turn.

Kenya’s economy right now is like a bus that’s moving; but not quite at full speed, and with a driver who has to watch for potholes, erratic boda bodas, and the occasional goat crossing the road.

The Political-Narrative Edge: Policy, Perception, and Public Discourse

Monetary policy is never just about numbers; it’s also about vibes. And in Nairobi’s boardrooms, parliament chambers, and roadside chama meetings, the CBK’s seventh straight rate cut is being read in very different ways.

For the government, the rate cuts are a chance to paint an optimistic picture: inflation is under control, the shilling is steady, and credit should soon be flowing. It’s the kind of story that fits neatly into the Vision 2030 and Bottom-Up Economic Transformation Agenda (BETA) narratives; “we are creating an enabling environment for growth.” In political terms, a falling CBR is like lower fuel prices, easy to sell as proof of progress, even if the benefits to the average mwananchi take a while to show up.

For businesses, the mood is mixed. Large corporates and export-focused sectors appreciate the stability and cheaper borrowing costs. But MSMEs are still muttering that the cuts feel like rain clouds that never quite reach their farms. Until bank lending practices loosen, rate cuts remain more a headline than a cash-flow reality.

Investors, both domestic and foreign, are reading the CBK’s moves as a sign that policymakers are prioritizing growth. But there’s a split here too: the optimists see it as proactive easing before the economy stalls; the skeptics worry it’s a sign of deeper fragility, especially given the stubborn NPLs and tepid private credit growth.

Then there’s the public discourse, and here’s where satire writes itself. In WhatsApp groups and matatu debates, some joke that the CBK is cutting rates faster than unga prices are falling (which is to say, not fast enough to feel). Others point out that for most households, the real economic story is told at the supermarket till, not in the MPC statement.

Politically, monetary easing can also be a double-edged sword. If growth picks up and inflation stays tame, the CBK will be hailed as a shrewd conductor guiding the economy through turbulence. But if inflation suddenly spikes, say from a bad harvest or oil price shock, critics will quickly label the cuts as reckless populism.

Bottom line? The shilling’s rollercoaster ride isn’t over. The CBK may be firmly in the driver’s seat, but the road ahead has bends, bumps, and a few unmarked detours. Whether this journey ends in smooth growth or an emergency stop will depend on how well rate cuts are transmitted to the real economy, how resilient Kenya’s external buffers remain, and whether fiscal policy complements, rather than contradicts, the monetary stance.

For now, Kenyans are along for the ride. The question is: when we get to the next stop, will we be talking about a well-executed economic tour, or asking the conductor for a refund?