CBK Governor Kamau Thugge
Kenyans will continue accessing loans at a relatively lower cost despite rising fuel-driven inflation triggered by the conflict in the Middle East.
The Central Bank of Kenya's Monetary Policy Committee (MPC) has retained the Central Bank Rate (CBR) at 8.75 per cent despite inflation rising to 6.7 per cent in May from 5.6 per cent in April.
In its meeting on Tuesday chaired by CBK Governor Kamau Thugge, the MPC said inflation remains within the government's target range of 2.5 per cent to 7.5 per cent, allowing policymakers room to retain borrowing costs while closely monitoring emerging risks.
"Having considered these developments, including the potentially transitory nature of the conflict, the committee concluded that the current monetary policy stance, with the Central Bank Rate unchanged at 8.75 per cent, remains appropriate," the MPC said in a statement.
The decision means commercial banks are unlikely to raise lending rates, offering relief to households and businesses already grappling with the high cost of living and elevated operating expenses directly linked to rising global oil and energy prices.
The MPC attributed the latest rise in inflation largely to higher fuel prices following disruptions in global supply chains caused by the escalating conflict in the Middle East.
According to the committee, global oil prices have risen sharply as the crisis affects supply chains and transportation costs, triggering inflationary pressures across many economies.
The effects have also been felt in Kenya, where fuel and cooking gas prices contributed significantly to the increase in inflation recorded in May.
Despite state interventions, including a VAT cut to 8 per cent and stabilisation subsidies, May pump prices shot to Sh214.25 per litre of petrol, Sh232.86 per litre of diesel, and Sh191.38 per litre for kerosene in Nairobi.
Core inflation, which excludes food and energy prices, rose to 3.2 per cent from 2.8 per cent in April, largely driven by higher transport costs linked to increased fuel prices.
Non-core inflation jumped to 16 per cent from 13.4 per cent, reflecting rising fuel and gas costs as well as elevated prices for some vegetables, particularly tomatoes and cabbages.
Despite the increase, the MPC expressed confidence that inflation would remain within the target range in the near term, provided tensions in the Middle East ease.
The conflict pitting the US and Israel against Iran has resulted in disruption of cargo passage through the Strait of Hormuz, a critical narrow waterway at the end of the Persian Gulf through which a third of the world's fuel is distributed.
The committee pointed to several factors expected to cushion the economy against further price shocks, including government interventions such as fuel subsidies and temporary tax relief measures, favourable weather conditions supporting food production, and continued stability of the Kenya shilling.
The MPC's decision comes against a backdrop of weakening global growth prospects.
The committee noted that the Middle East conflict has dampened the global economic outlook, with world growth projected to slow to 3.1 per cent in 2026 from 3.4 per cent in 2025.
Global inflation is also expected to rise to 4.4 per cent from 4.1 per cent over the same period due to higher energy and transportation costs.
Central banks in major economies have largely adopted a cautious approach, keeping policy rates unchanged as they assess the full impact of the conflict on inflation and economic activity.
While inflation remains a concern, the MPC also had to balance its decision against signs of slower economic growth.
Kenya's economy expanded by 4.6 per cent in 2025, slightly lower than the 4.7 per cent recorded in 2024, reflecting slower growth in agriculture and services.
Although industrial activity, particularly construction, showed stronger performance, the committee revised down its growth forecast for 2026 to 4.9 per cent from an earlier projection of 5.3 per cent.
The downgrade was attributed mainly to increased uncertainty arising from global developments, especially the conflict in the Middle East and continued trade policy disruptions.
Leading indicators, however, suggest the economy remains resilient, with business leaders expressing optimism about economic prospects over the next 12 months.
Findings from recent CEO and market perception surveys cited by the MPC showed confidence is being supported by expected favourable weather conditions, infrastructure spending, increased digital innovation, a stable exchange rate and improving private sector credit growth.
Nevertheless, respondents identified inflationary pressures, global uncertainty, weak consumer demand and the high cost of doing business as major risks.
The committee noted continued improvement in private sector lending, reflecting stronger demand for loans following the gradual decline in lending rates.
Average commercial bank lending rates fell to 14.5 per cent in May from 17.2 per cent recorded in November 2024, reinforcing the impact of previous monetary policy easing measures.
Growth in commercial bank credit to the private sector accelerated to 9.3 per cent in May from 7.1 per cent in April, with credit growth in key sectors including trade, agriculture, construction and consumer goods remaining robust.
Overall, the banking sector remained stable, with adequate liquidity and capital buffers. The ratio of non-performing loans declined to 15.3 per cent in May from 17.6 per cent recorded in August last year, indicating gradual improvement in asset quality across the sector.
The MPC said it will continue monitoring developments in global oil markets and their impact on inflation and remains ready to take further action if necessary to safeguard price stability and support sustainable economic growth.
The committee is scheduled to hold its next monetary policy meeting in August.
