CBK retains lending rate at 8.75% despite rising inflation

According to Central Bank Governor Kamau Thugge, who also chairs the Monetary Policy Committee, the conflict in the Middle East has disrupted global supply chains, leading to higher energy prices and transportation costs, which have in turn pushed up inflation.

Although Kenya’s overall inflation is expected to remain within the target range in the near term, the committee noted that its decision aligns with the cautious approach being adopted by central banks across the globe.

The decision, however, goes against expectations from sections of the industry that had called for monetary tightening to counter rising inflationary pressure.

Kenyans will therefore continue accessing loans at relatively lower costs despite rising fuel-driven inflation linked to the Middle East conflict.

The Monetary Policy Committee retained the Central Bank Rate at 8.75 percent even as inflation rose to 6.7 percent in May from 5.6 percent in April.

In its latest meeting, the committee observed that inflation remains within the government’s target range of 2.5 percent to 7.5 percent, giving policymakers room to maintain borrowing costs while closely monitoring emerging risks.

“Our decision on whether to tighten is based on the data we receive during the MPC meeting. At this stage, we will have to wait and see what happens with food prices. Surveys show that food inflation may decelerate, and these hostilities may cease very quickly. At this point, it is difficult to say, but we are keeping an eye on developments, especially with regard to oil prices,” said Thugge.

The Central Bank Governor also expressed optimism that food inflation could moderate in the coming months.

He pointed to several factors expected to cushion the economy against increased price shocks, including government interventions such as fuel subsidies and temporary tax relief measures, as well as favourable weather conditions supporting food production.

Thugge further expressed optimism that a quick resolution to tensions in the Middle East would lower global oil prices and reduce inflationary risks.

“The easing we undertook before the pause has had a fairly positive impact. We have seen Treasury bill rates decline quite significantly. We also saw commercial lending rates decline to 14.5 percent, and obviously the intention was to stimulate credit to the private sector, and we have seen lending improve,” he stated.

The Central Bank has also revised its economic growth projection downwards and now expects Kenya’s economy to grow by 4.9 percent this year due to the knock-on effects of the Middle East conflict.

The revised forecast is 100 basis points lower than the projection made by the National Treasury.