CBK defies inflation concerns to hold key lending rate at 8.75 per cent

Central Bank of Kenya. [File, Courtesy]

The Central Bank of Kenya (CBK) held its benchmark lending rate at 8.75 per cent on Wednesday, defying mounting global inflation pressures to spare borrowers further increases in loan costs, even as it flagged rising energy prices and geopolitical tensions as key risks to the economy.

The Monetary Policy Committee (MPC), chaired by CBK Governor Kamau Thugge, said the current policy stance "remains appropriate to ensure that inflation expectations remain anchored within the target range, and the exchange rate remains stable."

The decision, reached at the MPC's October 7 meeting, marks a continuation of the Apex bank's cautious approach as it balances the need to contain inflation against supporting economic growth, which has been revised upwards to 5.0 per cent for 2026 from an earlier projection of 4.9 per cent.

"Having considered these developments, 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 released Wednesday.

The shilling has remained stable against major currencies, supported by foreign exchange reserves of $14,702 million, equivalent to 5.9 months of import cover, providing what the committee described as "adequate cover and a buffer against short-term domestic and external shocks."

Kenya's overall inflation rose to 6.8 per cent in September from 6.6 per cent in August, but remained within the government's target range. Core inflation, which excludes volatile food and energy prices, climbed to 4.0 per cent from 3.4 per cent, driven by higher prices of processed foods including milk, wheat products, and edible oils. Non-core inflation declined to 14.0 per cent from 14.7 per cent, reflecting lower vegetable and energy prices.

The committee noted that government interventions, including subsidies and a temporary reduction of Value Added Tax on fuel, "continue to mitigate inflationary pressures," and projected that overall inflation would remain within the target range in the near term.

The decision to hold rates comes amid a challenging global environment. The MPC said global growth is projected to moderate in 2026 due to higher energy prices arising from the conflict in the Middle East, with elevated trade policy uncertainty and the ongoing Russia-Ukraine conflict adding to the risks.

Global inflation is expected to increase this year, mainly on account of higher energy and food prices. Inflation rates in most major economies have risen in recent months and remained above their respective targets, prompting central banks in some countries to make modest upward adjustments to policy rates while others have held steady.

"Food inflation increased in September 2026, driven by higher prices of edible oils, cereals and sugar," the MPC said. "Central banks in the major economies have remained cautious, with some making modest upward adjustments to their policy rates, while others have kept their policy rates unchanged as they continue to assess the impact of the conflict in the Middle East on their inflation and growth outlooks."

CBK Governor Kamau Thugge. [File, Courtesy]

Domestically, the committee pointed to sustained optimism about business activity and economic growth prospects for the next 12 months, citing continued macroeconomic stability, increased government infrastructure spending, digital innovations, and improved private sector credit growth.

Growth in commercial banks' lending to the private sector remained strong at 10.6 per cent in September, compared to 10.3 per cent in August and -2.9 per cent in January 2025. Average lending rates stood at 14.4 per cent in September, down from 17.2 per cent in November 2024, reflecting improved demand for credit.

The ratio of gross non-performing loans to gross loans stood at 13.9 per cent in September, down from 14.8 per cent in June 2026 and 17.6 per cent in August 2025, with decreases noted in the financial services, agriculture, trade, and energy and water sectors. Banks have continued to make adequate provisions for NPLs.

Despite the positive outlook, the MPC flagged several risks, including prolonged geopolitical tensions, elevated trade policy uncertainties, and the potential severe impact of the El Niño weather phenomenon. The committee said it would "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."

The current account deficit is estimated at 3.1 per cent of GDP in the 12 months to August 2026, compared to 2.1 per cent in the same period in 2025, due to a higher trade deficit and lower secondary income transfers. Goods exports increased by 11.8 per cent, driven by horticulture, tea, and machinery and transport equipment, while goods imports rose 15.8 per cent, reflecting higher imports of food, mineral fuels, and intermediate and capital goods.

Diaspora remittances decreased by 1.3 per cent, while services receipts increased by 8.7 per cent, mainly driven by travel services. The current account deficit is projected at 3.2 per cent of GDP in 2026, mainly reflecting increased imports of mineral fuels on account of higher international oil prices and lower remittances, said the MPC.

The deficit is expected to be more than fully financed by financial and capital account inflows, resulting in an overall balance of payments surplus of $2,426 million in 2026.

The MPC's next meeting is scheduled for December 2026.