The Central Bank of Kenya (CBK) kept its benchmark lending rate unchanged for the second policy meeting in a row at 8.75 percent amid the uncertainty triggered by the Iran war.
The decision to hold the Central Bank Rate (CBR) has left investors and banks in limbo on the direction of domestic interest rates that had started rising to cover the surge in inflation, and bankers expected the benchmark rate to increase.
CBK said it would monitor the impact of global oil prices on inflation, which rose sharply in April and May, driven by fuel price hikes triggered by the surge in global energy costs linked to the Iran war.
Inflation rose to 6.7 percent in May and is approaching the top of the government’s preferred 2.5 percent-7.5 percent range.
Major central banks around the world, including the US Federal Reserve, have adopted a similar stance, favouring the wait-and-see approach as the end of the Middle East war remains uncertain.
In Kenya, Tuesday’s monetary policy meeting had been eagerly awaited to signal the trend in interest rates over the coming months, including commercial bank lending rates and the returns offered by government securities like Treasury bills and bonds.
CBK is signaling that bank lending rates, which stood at an average of 14.5 percent in May, 14.7 percent in April and 17.2 percent in November, should remain little changed.
But returns on Treasury bills and bonds have increased in recent weeks as investors seek rates that compensate for inflation.
“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 percent, remains appropriate to ensure that inflation expectations remain anchored within the target range, and the exchange rate remains stable,” CBK said in its monetary policy statement on Tuesday.
CBK revised down its economic growth forecast for this year to 4.9 percent from a previous projection of 5.3 percent.
Government interventions, including subsidies and the temporary reduction of value-added tax on fuel, are expected to support the benign inflation outlook.
The return of favourable weather conditions is seen contributing to stability in food prices, while a stable exchange rate is expected to insulate consumer prices from further volatility.
The Kenyan shilling has held its own in the aftermath of the start of the US-Israel war on Iran, as it continues to exchange hands in a narrow range of between Sh129 and Sh130 against the US dollar.
CBK’s latest monetary stance largely mirrors major central banks, with the US Federal Reserve being widely expected to leave its funds rate unchanged for much of 2026 as it monitors the impact of the war.
Market perception survey conducted by the CBK ahead of the June policy meeting showed expectations of an upward pressure on inflation but sustained optimism about business activity and economic growth prospects over the next year.
CBK has nevertheless cut its growth forecast for 202 from 5.3 percent to 4.9 percent to reflect the continued uncertainty, with the cut weighing the chance of a prolonged conflict, coupled with elevated trade policy uncertainties.
The current account was already projected to widen to an equivalent three percent of GDP compared to 2.1 percent in 2025, mirroring higher international oil prices, lower services receipts, tapered remittances growth and reduced exports.
The banking sector is meanwhile expected to remain resilient, supported by healthy capital and liquidity buffers and improved asset quality, where the ratio of gross non-performing loans (NPLs) improved to 15.3 percent in May from 15.6 percent in February.
Private sector credit growth has continued to expand in the shadows of the conflict, touching 9.3 percent in May 2026 from 7.1 percent in April.
CBK said it will continue to monitor the evolution of the conflict, including second-round inflationary effects ahead of its next policy-setting meeting in August 2026.
“The MPC noted that there is a need to continue monitoring the evolution of global oil prices and any second-round effects on inflation, as well as other developments in the global and domestic economies, and stands ready to take further action as necessary in line with its mandate,” CBK added.
