The Central Bank of Kenya (CBK) has lowered the base lending rate, sparing borrowers costly loans.
The CBK lowered the lending rate to 8.25 per cent from 8.50 per cent to boost the economy, which it said is operating below its potential.
The bank's Monetary Policy Committee (MPC) on Monday said it had assessed that the effects of lowering the Central Bank Rate in November 2019 have continued to be transmitted into the economy.
In lowering the rate further, banks are also expected to cut lending rates to their clients so as to enhance the country's economic growth and trade.
"The committee will closely monitor the impact of this change to its policy stance. The MPC will continue to closely monitor developments in the global and domestic economy, and it stands ready to take additional measures as necessary," said CBK Governor Patrick Njoroge, who is also the committee's chairman.
He said the committee noted there was room for further accommodative monetary policy to support the country's economic activities.
The committee met to review the outcome of its previous policy decisions and recent economic developments.
The meeting was held against the backdrop of domestic macroeconomic stability, potential risks to food supply and increased global uncertainties.
CBK said a survey conducted this month indicates that inflation expectations remain well anchored mainly due to expected lower food and electricity prices.
However, there are expectations that the recent disruptive rainfall and locust invasion could lead to post-harvest losses and exert moderate upward pressure on food prices.
But Kenyans who participated in the survey titled "Private Sector Market Perception", remained optimistic on economic prospects due to, among other factors, payments of pending bills by the government.
Kenyans are also optimistic due to the improving weather conditions, implementation of the Big Four agenda projects, improved lending to the private sector following the repeal of interest rate caps and renewed focus by the government on agriculture and small and medium entrepreneurs.
There are also hopes because of a stable macroeconomic environment.
Further, CBK said month-on-month overall inflation remained within the target range in November and December 2019.
"Overall inflation is expected to remain within the target range in the near term due to lower prices of fast-growing food items following the ongoing rains and lower electricity prices," said Dr Njoroge