• Policymakers had held the benchmark rate for seven straight times before Monday's cut.
Central Bank cut its benchmark lending rate for the first time in more than a year on Monday, saying tightening fiscal policy had provided room to ease in an effort to coax an economy operating below its potential.
The bank's Monetary Policy Committee cut the rate by 50 basis points to 8.50%, in its first meeting since the East African nation lifted a cap on commercial interest rates that it said had stifled credit growth and held back the economy.
Policymakers had held the benchmark rate for seven straight times before Monday's cut.
"The Committee noted the ongoing tightening of fiscal policy and concluded there was room for accommodative monetary policy to support economic activity," the bank said.
Eight analysts polled by Reuters had expected policymakers to keep the benchmark rate at 9.0%, where it has been since the end of July 2018. Four had forecast a cut.
"I think the MPC was largely emboldened by the repeal of the interest rate capping law," Jibran Qureishi, economist for East Africa at Stanbic Bank, said after the rate decision.
Governor Patrick Njoroge told Reuters earlier this month the scrapping of the interest rate cap had removed one of the concerns the central bank had about cutting the benchmark.
"This reform should restore the clarity of monetary policy decisions and strengthen the transmission of monetary policy," the bank said on Monday.
In mid-November, the finance ministry sent a supplementary budget to parliament that sees the fiscal deficit at 6.3% of GDP in financial year 2019-20, which began in July, up from an earlier target of 5.9%.
Inflation rose to 4.95% year-on-year in October from 3.83% a month earlier.
Razia Khan, head of research for Africa at Standard Chartered Bank, said there was little room for more monetary easing with inflation likely to rise before the end of 2020.
"With inflation likely to pick up ... and in line with revived economic activity in Kenya, there may not be much room for the CBK to ease a lot more on a sustained basis," Khan said.
Private sector credit grew by 6.6% in the 12 months to October, compared with 7.0% in September, the central bank said.
The bank said it expects the current account deficit to narrow to 4.3% of GDP this year, from 5.0% a year earlier.