CBK Governor Kamau Thugge. /FILEThe Central Bank of Kenya has retained its base lending rate at 8.75 per cent on stronger economic growth, easing commercial bank lending rates and sustained macroeconomic stability.
In its meeting held on Tuesday, the Monetary Policy Committee (MPC) said the monetary policy stance was appropriate to keep inflation expectations within the target range and maintain exchange rate stability.
The decision comes as the Kenyan economy continues to gain momentum, with growth accelerating to 5.3 per cent in the first quarter of 2026 from 4.9 per cent in the corresponding period last year.
The committee chaired by CBK Governor Kamau Thugge said the growth was broad-based across all sectors, with industry and services recording stronger performance.
"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," Thugge said.
The committee projects the economy to grow by 4.9 per cent in 2026 and 5.3 per cent in 2027, compared with 4.6 per cent in 2025.
It attributed the outlook to a robust industrial sector, resilient services and stable growth in agriculture.
Cost of credit continues to fall
The decision to maintain the Central Bank Rate comes against a backdrop of declining commercial bank lending rates and stronger growth in credit to the private sector.
Commercial banks' lending to the private sector grew by 10.2 per cent in July, compared with 10.6 per cent in June and a contraction of 2.9 per cent in January 2025.
The MPC said credit growth in key sectors, including trade, building and construction, agriculture and consumer durables, remained strong.
It attributed the growth to improved demand for credit, which it said was in line with the decline in lending interest rates.
Average commercial bank lending rates fell to 14.3 per cent in July from 14.4 per cent in June and 17.2 per cent in November 2024.
The committee also noted that the banking sector remained stable and resilient, supported by strong liquidity and capital adequacy ratios.
The ratio of gross non-performing loans to gross loans fell to 14.6 per cent in July from 15.4 per cent in April and 17.6 per cent in August 2025.
The MPC said the decline in non-performing loans was recorded in manufacturing, building and construction, trade, agriculture and real estate, while banks continued to make adequate provisions for bad loans.
Inflation remains within target range
The MPC retained the rate despite inflation edging up marginally in July.
Overall inflation stood at 6.5 per cent in July, compared with 6.4 per cent in June, while core inflation remained relatively stable at 3.2 per cent from 3.1 per cent.
Non-core inflation declined marginally to 15 per cent from 15.1 per cent, supported by lower energy prices following government interventions, including subsidies and a temporary reduction of VAT on fuel.
"Nevertheless, the food inflation component remained elevated on account of higher vegetable prices, particularly Irish potatoes, tomatoes, kales, cabbages and onions," MPC said.
The committee expects overall inflation to remain within the target range in the near term, assuming a de-escalation of the conflict in the Middle East.
It said this outlook would be supported by “appropriate monetary policy actions”, government interventions, expected stability in food prices and a stable exchange rate.
Global risks outlook
The MPC said global economic conditions remained uncertain, particularly because of higher energy prices linked to the conflict in the Middle East.
Global growth is projected to moderate to 3 per cent in 2026 from 3.5 per cent in 2025, while global inflation is expected to rise to 4.7 per cent from 4.1 per cent.
The committee said central banks in most major economies had maintained a cautious approach and kept their policy rates unchanged as they assessed the impact of the Middle East conflict on inflation and growth.
It also identified elevated trade policy uncertainty and the Russia-Ukraine conflict as other risks to global growth.
The MPC said Kenya's economic outlook was similarly exposed to the effects of prolonged conflict, elevated trade policy uncertainty and the potential adverse impact of the El Niño weather phenomenon.
Forex reserves remain strong
Kenya's external position remained relatively strong, with foreign exchange reserves standing at $15.249 billion (Sh1.971 trillion), equivalent to 6.3 months of import cover.
The MPC said the reserves continued to provide adequate cover and a buffer against short-term domestic and external shocks.
However, the current account deficit widened to an estimated 3 per cent of GDP in the 12 months to June 2026, from 1.9 per cent in a similar period in 2025.
The increase was attributed to a higher trade deficit and lower secondary income transfers as a share of GDP.
Goods exports rose by 8.9 per cent, driven mainly by horticulture, tea and machinery and transport equipment, while goods imports increased by 13.1 per cent.
The MPC said the increase in imports reflected higher purchases of food, mineral fuels, intermediate goods and capital goods.
The current account deficit is projected to remain at 3 per cent of GDP in 2026, compared with 2.1 per cent in 2025, mainly because of increased mineral fuel imports arising from higher international oil prices, lower remittances and export receipts.
Despite the wider deficit, the committee projects an overall balance of payments surplus of $2.485 billion (Sh 321.48 billion) in 2026, with the current account deficit expected to be more than fully financed by financial and capital account inflows.
Business outlook remains positive
The MPC also pointed to sustained optimism among businesses about economic activity and growth prospects over the next 12 months.
The July CEOs Survey and Market Perceptions Survey showed that optimism was supported by continued macroeconomic stability, government support for agriculture, prospects for favourable weather, increased infrastructure spending, digital innovation, a stable exchange rate and improved private-sector credit growth.
However, businesses remained concerned about global uncertainties linked to the conflict in the Middle East and high energy costs.
The MPC said it would continue monitoring global oil prices and any second-round effects on inflation, alongside other developments in the global and domestic economies and would advice appropriately.
“The committee stands ready to take further action as necessary in line with its mandate,” it said.
The MPC is scheduled to meet again in October 2026.
