Kenya’s lenders seek first rate hike since 2024 amid oil-driven inflation

The Kenya Bankers Association (KBA) has urged the Central Bank of Kenya (CBK) to raise its benchmark interest rate at next week’s Monetary Policy Committee (MPC) meeting, citing renewed inflationary pressures driven by higher oil prices, slowing economic activity, and risks to the country’s import bill.

In a note on Wednesday, the banking lobby said a modest increase in the Central Bank Rate (CBR) would help anchor inflation expectations and safeguard price stability.

If adopted, the move could lead to higher borrowing costs for households and businesses. The last time the CBK raised the benchmark rate was in February 2024.

“As the CBK’s Monetary Policy Committee (MPC) prepares to meet next week, we recommend a modest increase in the CBR to help control rising inflation,” the association said. If implemented, Kenya would join peers such as South Africa, Mauritius, Botswana and Rwanda, which have recently tightened monetary policy to curb mounting inflationary pressures.

The recommendation comes as inflation continues to accelerate in East Africa’s largest economy, fuelled largely by rising energy costs linked to geopolitical tensions in the Middle East.

Data from the Kenya National Bureau of Statistics shows annual inflation rose to 6.7 percent in May from 5.6 percent in April, reaching its highest level since January 2024.

The sharp increase was driven mainly by transport costs following government fuel price hikes in April and May amid rising global crude oil prices linked to the conflict involving the United States, Israel and Iran.

The bankers’ group warned that second-round effects from higher fuel costs could push inflation closer to the upper limit of the CBK’s target range of 7.5 percent.

According to KBA, rising crude oil prices have already increased fuel costs across the economy, raising the prospect of further price increases in transportation, manufacturing and other essential goods and services.

“Inflationary pressures have re-emerged from oil supply shock, triggering expectations of higher price rises from the shock’s second-round effects, and calling for monetary policy to provide a cushion,” the bankers noted.

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Beyond inflation concerns, KBA warned that economic growth could weaken further in 2026 as businesses and households grapple with rising operating costs and reduced purchasing power.

The association pointed to recent Purchasing Managers’ Index data, which showed business activity remaining below the 50-point threshold, signalling a continued contraction in private sector activity.

KBA also noted that private-sector credit growth has begun to recover following earlier reductions in lending rates. However, uncertainty surrounding future interest rates and rising inflation could dampen borrowing demand and increase risks within the banking sector.

A higher CBR would likely prompt commercial banks to raise lending rates, making credit more expensive for consumers and businesses.

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Households servicing existing loans could face higher monthly repayments, while businesses seeking new financing may have to contend with elevated borrowing costs at a time of slowing economic momentum.

“Considering the above developments and the balance of risks, we opine that a timely upward adjustment of the Central Bank Rate will effectively anchor inflation expectations and support price stability in the medium term,” KBA argued.