US Fed interest rate cut could spark a rare opportunity for Kenya’s economy
Although the Fed rate directly sets short-term borrowing costs for banks, its effects spill over into mortgages, auto loans, and credit cards across the US market.
The United States Federal Reserve on Wednesday approved a widely anticipated interest rate cut and signalled that two more could follow before the end of the year.
This marks the Fed’s first rate cut of 2025, lowering its benchmark range from 4.25–4.50 per cent to 4.00–4.25 per cent.
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Fed Chair Jerome Powell described the move as “a risk management” decision, noting it was aimed at supporting the US economy rather than responding to an immediate downturn.
Although the Fed rate directly sets short-term borrowing costs for banks, its effects spill over into mortgages, auto loans, and credit cards across the US market.
For Kenya, the decision signals potential relief ahead. Local borrowing costs are influenced by the Central Bank of Kenya’s (CBK) base lending rate, which often mirrors shifts in the US benchmark.
Base lending rates
Typically, when the Fed lowers rates, other global economies—including Kenya—adjust their own base lending rates in the same direction.
The CBK’s Monetary Policy Committee often aligns its stance with the Fed, given the dollar’s role as the world’s reserve currency and its centrality in foreign exchange markets.
This alignment shapes inflation management and broader economic policy. Experts note that because the US dollar is used in over 70 per cent of global trade, “any monetary changes that impact its value is a significant concern for other economies,” particularly for developing nations reliant on dollar-denominated imports.
When the Fed raises rates, it usually seeks to curb inflation. Higher US rates reduce dollar supply, strengthening the greenback against local currencies such as the Kenyan shilling. A weaker shilling makes imports more expensive, pushing up the cost of goods and fuelling inflation.
Contain price pressures
To counter this, the CBK typically raises its base lending rate in line with the Fed, aiming to contain price pressures. Conversely, when inflation moves closer to target in both economies, interest rates are cut to ease credit costs and expand the money supply.
Globally, central banks use interest rates as either a brake or a gas pedal for the economy. They set short-term borrowing rates for commercial banks, which then pass the costs on to businesses and consumers.
“With inflation running high, they can raise interest rates and use that to pump the brakes on the economy to get inflation under control.”
In August, the CBK lowered its benchmark Central Bank Rate (CBR) by 25 basis points to 9.5 per cent, down from 9.75 per cent. That was the seventh consecutive cut since the historic peak of 13.0 per cent.
Meanwhile, Kenya’s overall inflation edged up slightly to 4.5 per cent in August from 4.1 per cent in July, but it remains below the 5±2.5 per cent target band.
Looking ahead, the Fed’s indication of further cuts could also pave the way for additional reductions in the CBK’s base lending rate.
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