The Central Bank of Kenya (CBK) has kept its benchmark lending rate unchanged at 8.75 per cent, choosing to support economic growth and affordable credit even as inflation edged closer to the upper limit of the government’s target range.
The decision was announced on Tuesday following a meeting of the Monetary Policy Committee (MPC) chaired by CBK Governor Kamau Thugge. The committee held the Central Bank Rate (CBR) steady despite inflation rising to 6.7 per cent in May from 5.6 per cent in April, a jump largely linked to higher fuel and energy costs caused by tensions in the Middle East.
By retaining the rate, the CBK signalled confidence that the recent increase in prices is manageable and may not require immediate tightening of monetary policy. The move is expected to provide relief to households and businesses that have been struggling with the rising cost of living and operating expenses.
The committee noted that inflation remains within the government’s preferred range of 2.5 per cent to 7.5 per cent. While the latest figures show growing pressure on consumer prices, policymakers believe the economy can absorb the shock without the need for higher borrowing costs.
The inflation surge has been largely driven by developments thousands of kilometres away. The ongoing conflict involving Iran, Israel and the United States has disrupted shipping and energy markets, particularly around the Strait of Hormuz, a key route for global oil exports. The uncertainty has pushed up international crude oil prices, increasing fuel costs across many countries.
Kenya has not been spared from the ripple effects. Fuel prices rose sharply in May, with motorists paying more for petrol, diesel and kerosene. The increase in transport and energy costs has gradually filtered through the economy, affecting the prices of goods and services.
According to the MPC, core inflation, which excludes volatile food and energy prices, rose to 3.2 per cent in May from 2.8 per cent a month earlier. This increase was mainly attributed to higher transport-related costs. Non-core inflation climbed even faster, reaching 16 per cent from 13.4 per cent, driven by rising fuel, cooking gas and vegetable prices.
Even so, the central bank remains optimistic that inflation will remain under control in the coming months. It pointed to several factors that could ease pressure on consumers, including favourable weather conditions expected to boost food production, government fuel support measures and the continued stability of the Kenyan shilling against major global currencies.
The MPC’s decision also reflects concerns about the pace of economic growth. Kenya’s economy expanded by 4.6 per cent in 2025, slightly lower than the 4.7 per cent recorded in 2024. Although sectors such as construction and manufacturing continued to show strength, growth in agriculture and some service industries slowed.
As a result, the CBK revised its 2026 growth forecast downward to 4.9 per cent from an earlier estimate of 5.3 per cent. The central bank cited uncertainty in the global economy, disruptions in international trade and the Middle East conflict as key risks facing growth prospects.
Despite these challenges, business sentiment remains largely positive. Surveys conducted among chief executives and market participants showed confidence in the economy’s outlook over the next year. Respondents highlighted infrastructure development, technological innovation, favourable weather conditions and exchange rate stability as factors likely to support growth.
There are also encouraging signs from the banking sector. Average commercial bank lending rates have fallen significantly over the past several months, dropping to 14.5 per cent in May from 17.2 per cent in November 2024. The decline has encouraged more borrowing by businesses and households.
Private sector credit growth accelerated to 9.3 per cent in May from 7.1 per cent in April, with strong demand recorded in trade, agriculture, construction and consumer-related sectors. At the same time, the ratio of non-performing loans fell to 15.3 per cent from 17.6 per cent last August, suggesting an improvement in borrowers’ ability to repay loans.
With inflation still within target and lending activity recovering, the CBK appears keen to maintain a delicate balance between controlling prices and supporting economic expansion.
The committee said it will keep a close watch on movements in global oil prices and other economic trends ahead of its next meeting in August.
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