The Central Bank of Kenya (CBK) has opted to hold its benchmark lending rate steady at 8.75 per cent, signaling confidence that the current monetary policy stance is sufficient to contain inflation while cushioning the economy from growing global uncertainties triggered by the escalating conflict in the Middle East.
At its meeting in June, the Monetary Policy Committee (MPC), chaired by CBK Governor Dr. Kamau Thugge, resolved to leave the Central Bank Rate (CBR) unchanged, arguing that maintaining the current stance would help keep inflation expectations anchored and preserve exchange rate stability amid mounting external pressures.
The decision comes at a time when the global economy is grappling with renewed turbulence. The conflict in the Middle East has disrupted supply chains, pushed up energy prices and transportation costs, and weakened growth prospects worldwide.
Global growth is now projected at 3.1 per cent in 2026, down from 3.4 per cent in 2025, as higher inflation and reduced demand weigh on economic activity.
Policymakers also cited lingering trade tensions and the protracted Russia-Ukraine war as additional risks to the global outlook.
Worldwide inflationary pressures have intensified, with global inflation expected to rise to 4.4 per cent this year from 4.1 per cent in 2025.
Higher oil prices and increased transport costs have pushed inflation above target levels in many advanced economies, prompting central banks to adopt a cautious approach and maintain existing policy rates while assessing the impact of the Middle East crisis.
In Kenya, inflation accelerated to 6.7 per cent in May 2026 from 5.6 per cent in April, largely due to rising fuel and energy prices linked to elevated international oil prices. Despite the increase, inflation remained within the government’s target range of 5 per cent, plus or minus 2.5 percentage points.
Core inflation, which excludes volatile food and fuel prices, rose to 3.2 per cent from 2.8 per cent, driven mainly by higher transport costs. Processed food inflation remained relatively stable, supported by lower prices of sugar and maize products.
However, non-core inflation climbed sharply to 16 per cent from 13.4 per cent, reflecting increases in fuel, cooking gas and prices of vegetables such as tomatoes and cabbages.
The CBK expects inflation to remain within the target range over the near term, assuming tensions in the Middle East ease. Authorities believe this outlook will be supported by prudent monetary policy, government interventions including fuel subsidies and temporary reductions in VAT on fuel, favourable weather conditions that are expected to stabilize food prices, and a relatively stable exchange rate.
Kenya’s economic growth slowed marginally to 4.6 per cent in 2025 from 4.7 per cent a year earlier, reflecting weaker performance in agriculture and services. However, the industrial sector posted a strong recovery, buoyed by construction activity.
Although leading indicators suggest resilient economic activity in the first quarter of 2026, the Central Bank has revised down its growth projection for the year to 4.9 per cent from an earlier estimate of 5.3 per cent. The downgrade reflects heightened uncertainty in the global environment, particularly the possibility of a prolonged Middle East conflict and persistent trade policy risks.
Surveys conducted by the Central Bank indicate that inflationary concerns are beginning to emerge among key sectors of the economy. Respondents to the May 2026 Agriculture Survey anticipated upward pressure on prices due to higher fuel costs, although they still expected inflation to remain within the target range thanks to favourable weather conditions and exchange rate stability.
Meanwhile, findings from the March 2026 CEOs Survey and Market Perceptions Survey revealed continued optimism among businesses regarding economic activity over the next 12 months. Executives cited expectations of favourable weather, increased infrastructure spending, continued digital innovation, exchange rate stability and improving private sector credit growth as reasons for confidence.
However, business leaders also expressed concern over rising global uncertainties, high operating costs, inflationary pressures and subdued consumer demand.
On the external front, Kenya’s current account deficit widened to 2.6 per cent of GDP in the twelve months to April 2026, compared with 1.7 per cent during the same period in 2025. The deterioration was attributed to a larger trade deficit and lower inflows from services and secondary income transfers.
Exports rose by 4.2 per cent, supported by stronger performance in horticulture, tea, coffee, food products and machinery and transport equipment. Imports increased by 8.5 per cent, driven by higher demand for food, intermediate goods, capital equipment and petroleum products.
Service receipts increased by 4.8 per cent, largely due to improved transport and travel earnings, while diaspora remittances rose modestly by 1.1 per cent. The current account deficit is projected to widen further to 3 per cent of GDP in 2026 because of higher oil prices, slower remittance growth, reduced exports and lower service receipts.
Nevertheless, the Central Bank said the deficit is expected to be fully financed through financial and capital inflows. Foreign exchange reserves stood at USD 13.2 billion, equivalent to 5.6 months of import cover, providing an adequate buffer against external shocks.
The banking sector continued to demonstrate resilience, supported by strong liquidity and capital buffers. The ratio of gross non-performing loans declined to 15.3 per cent in May from 15.6 per cent in February and 17.6 per cent in August 2025. Improvements were recorded in the personal and household, transport and communications, and mining sectors, while banks maintained adequate loan loss provisions.
Credit to the private sector also strengthened. Lending by commercial banks grew by 9.3 per cent in May, up from 7.1 per cent in April and a contraction of 2.9 per cent recorded in January 2025. The recovery was particularly evident in trade, construction, agriculture and consumer durable sectors as lower lending rates encouraged borrowing.
Average commercial bank lending rates declined to 14.5 per cent in May from 14.7 per cent in April and significantly below the 17.2 per cent recorded in November 2024, underscoring the impact of monetary easing measures implemented over the past year.
The Committee also took note of the government’s ongoing implementation of the 2025/26 Supplementary Budget and its medium-term fiscal consolidation agenda aimed at reducing debt vulnerabilities.
Despite mounting external risks, the MPC concluded that the current policy framework remains appropriate. However, policymakers cautioned that they would continue monitoring movements in global oil prices and any secondary effects on inflation, while remaining prepared to take additional measures should economic conditions warrant.
“The current monetary policy stance, with the Central Bank Rate unchanged at 8.75 percent, remains appropriate to ensure that inflation expectations remain anchored within the target range, and the exchange rate remains stable,” the Committee said.
The MPC is scheduled to hold its next meeting in August 2026, when it will reassess both domestic and international economic developments against the backdrop of an increasingly uncertain global environment.