After 10 consecutive rate cuts, the Central Bank left its base lending rate unchanged at 8.75 percent on Wednesday. This decision came amid increasing geopolitical tensions in the Middle East, which continue to push up energy prices.

CBK’s Monetary Policy Committee adopted a cautious pause as part of a policy stance to counter potential oil shock effects on East Africa’s largest economy. Kenya and economies around the region are bracing for the impact of the sharpest energy price increase since 2024.

“The Committee concluded that the current monetary policy stance remains appropriate to ensure that inflation expectations remain anchored within the target range, and the exchange rate remains stable,” the MPC said in a statement signed by Governor Dr. Kamau Thugge.

Yet behind the steady hand lies growing unease. CBK’s communiqué cited the ongoing US‑Israel military strikes against Iran as a primary source of fresh global uncertainty. “The conflict has disrupted global supply chains, leading to significantly higher energy prices and heightened risks to the global economic outlook.”

Since early March, the price of Brent crude has increased by over 18 percent, reaching a peak of $96 a barrel, as markets priced in potential disruptions to key shipping lane: The Strait of Hormuz. 

For Kenya, which is a net importer of refined petroleum products, the ripples of fuel shock are already being felt in the economy. Transport costs, power generation, and fertiliser prices are set to go up as traders factor in the cost of fuel. 

Already, oil marketing firms are under close scrutiny by the regulator as reports of stock outages and calls for upward price review intensify. What’s more, transport companies are reviewing their fares upwards. A bigger negative impact is projected to course through the economy in the coming months.

CBK: inflation under control — for now

On the surface, Kenya’s inflation numbers remain within target brackets. According to the Kenya National Bureau of Statistics, inflation stood at 4.4 percent in March, still below the 5.0 percent midpoint of CBK’s target range of 2.5 to 7.5 percent. 

During the month, the country’s core inflation, which strips out volatile food and fuel items, held steady at 2.1 percent, due to the lower cost of processed foods such as maize flour and sugar.

But beneath that calm, fissures are emerging. Non-core inflation, which is heavily influenced by fresh food and energy, edged up to 10.8 percent in March from 10.1 percent in February, driven by a jump in the prices of tomatoes and Irish potatoes. 

According to the March Agriculture Sector Survey, farmers and traders expect upward pressure on prices due to higher oil costs, reversing the benign outlook of just a month earlier.

“Despite expected upward pressure from higher energy prices, overall inflation is expected to remain within the target range in the near term, supported by appropriate monetary policy actions, expected stability in food prices attributed to favourable weather conditions, and a broadly stable exchange rate,” the MPC in its second sitting this year, noted.

However, the MPC acknowledged the need to “monitor any second-round effects.” This is a CBK’s parlance for the risk that higher fuel prices have on wages, transport, and other goods. It implies that should such effects materialise, the 8.75 percent rate may not hold for long.

Growth forecasts trimmed as travel takes a hit

According to the policymakers, the Middle East crisis is also negatively impacting Kenya’s growth trajectory. The MPC revised its 2026 GDP forecast downwards to 5.3 percent from a higher 5.5 percent, citing the negative impacts of the Middle East war on travel and tourism.

That growth projection cut follows a stronger-than-expected 2025 performance, when the economy expanded by 5.0 percent, up from 4.7 percent in 2024, driven by a rebound in industry and resilient services. 

Early economic indicators for the three months to March still point to solid activity, but the CBK warned that “a prolonged conflict in the Middle East, and elevated trade policy uncertainties” pose the greatest risks.

The external accounts are already feeling the strain. Kenya’s current account deficit widened to 2.4 percent of GDP in the 12 months to February 2026, up from just 1.3 percent a year earlier, as imports of intermediate and capital goods surged. 

For 2026, the CBK projects a deficit of 3.0 percent of GDP, due to higher oil import bills, weaker receipts from transport and tourism, and slower diaspora remittances. This is a far worse position than the previous 2.2 percent forecast.

Kenya’s forex reserves stand at $13.35 billion, equivalent to 5.68 months of import cover, well above the statutory threshold. That cushion has helped the Kenyan shilling remain stable against the U.S. dollar, even as other emerging market currencies have wobbled.

Banking sector health

The MPC noted that its previous rate cuts, which lowered the CBR from a peak of 17.2 percent in late 2024, are gradually benefiting borrowers. The average cost of loans fell to 14.7 percent in March 2026, down from 17.2 percent in November 2024. 

Additionally, the uptake of credit by the private sector accelerated to 8.1 percent in March, a sharp turnaround from the 2.9 percent contraction experienced in January 2025.

“Growth in credit to key sectors of the economy, particularly building and construction, trade, agriculture, and consumer durables, remained strong,” the committee observed, reflecting improved demand as borrowing costs ease.

A newly revised Risk-Based Credit Pricing Model, fully implemented last month, is expected to further improve transmission of policy rates to lending rates and enhance transparency, the CBK said.

However, asset quality in the banking industry remains a big concern. The ratio of gross non-performing loans (NPLs) edged up to 15.6 percent in March from 15.4 percent in December. The most affected borrowers are individuals and households, traders, agriculture, and manufacturing, effectively forcing lenders to continue making provisions.

A survey released alongside the MPC decision showed that Kenyan business leaders and market participants remain optimistic about the next 12 months. They cite stable inflation, lower interest rates, favourable weather, and increased infrastructure spending as reasons for their assessments. However, that optimism is now tempered by concerns over global uncertainty, high operating costs, and weak consumer demand.

“The MPC will closely monitor the impact of this policy decision, the evolution and impact of the conflict in the Middle East, as well as other developments in the global and domestic economies, and stands ready to take further action as necessary,” the committee said.

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