Kenya Holds Policy Rate at 8.75% as Middle East Conflict Raises Inflation Risks

August 12, 2026
By Mintesinot Nigussie

Kenya’s central bank kept its benchmark interest rate at 8.75 percent on Tuesday, opting to preserve its current monetary stance as stronger economic growth and easing credit conditions are weighed against renewed risks from higher global energy prices.

The Central Bank of Kenya’s Monetary Policy Committee said the Central Bank Rate remained appropriate for keeping inflation expectations anchored and supporting exchange-rate stability. The committee will next review the rate in October.

Kenya’s economy grew 5.3 percent in the first quarter of 2026, up from 4.9 percent a year earlier, with stronger performance in industry and services. The central bank expects growth to accelerate to 4.9 percent this year and 5.3 percent in 2027, from 4.6 percent in 2025.

Inflation, meanwhile, remained within the central bank’s target range, edging up to 6.5 percent in July from 6.4 percent in June. Core inflation was broadly stable at 3.2 percent, while non-core inflation eased to 15 percent from 15.1 percent.

The committee’s decision comes as the conflict in the Middle East threatens to push up energy and transport costs. The central bank expects global inflation to rise to 4.7 percent this year from 4.1 percent in 2025, while global growth is projected to slow to 3 percent from 3.5 percent.

Kenya’s domestic inflation outlook remains relatively contained, helped by government measures including fuel subsidies and a temporary reduction in VAT on fuel. Food prices remain a concern, particularly for vegetables such as potatoes, tomatoes, kale, cabbages and onions.

The rate hold comes alongside a marked improvement in private-sector credit. Commercial banks’ lending to the private sector grew 10.2 percent in July, compared with a contraction of 2.9 percent in January 2025. Average lending rates fell to 14.3 percent from 17.2 percent in November 2024.

The banking sector has also shown signs of improved asset quality. The ratio of gross non-performing loans to gross loans fell to 14.6 percent in July from 15.4 percent in April and 17.6 percent in August 2025. The decline was recorded across manufacturing, construction, trade, agriculture and real estate.

External pressures have nevertheless increased. Kenya’s current-account deficit widened to an estimated 3 percent of GDP in the 12 months to June, from 1.9 percent a year earlier, as imports grew faster than exports and remittance inflows weakened.

Goods exports increased 8.9 percent, led by horticulture, tea, and machinery and transport equipment, while imports rose 13.1 percent on higher purchases of food, fuel, intermediate goods and capital equipment. Diaspora remittances declined 2.4 percent.

Foreign-exchange reserves stood at 15.249 billion US dollars, equivalent to 6.3 months of import cover, providing a buffer against external shocks, according to the central bank.

The central bank’s surveys also point to continued confidence among businesses. Companies surveyed in July remained optimistic about activity over the next 12 months, citing macroeconomic stability, infrastructure spending, digital innovation, a stable exchange rate and improving access to credit.

The main threat to that optimism is external. The MPC said it would continue monitoring global oil prices and their potential second-round effects on inflation, as well as developments in the global and domestic economies.

Source: FSX Business News