Banks expect the Central Bank of Kenya (CBK) to raise its benchmark rate for the first time since February 2024, in response to a spike in inflation and emerging currency pressures following the Iran war, which is likely to trigger an increase in borrowing costs.
The move would impact borrowers, reversing a recent trend in which the cost of loans has softened due to falling inflation and adoption of a more transparent pricing model.
The banking sector lobby- the Kenya Bankers Association (KBA)-expects CBK to raise the key reference rate next month when the apex bank’s monetary policy committee meets on June 9.
The bankers lobby remains fretful of weaker purchasing power following a surge in inflation and expects the rise in cost-of-living measures to dampen demand for loans and escalate loan defaults.
Last month, CBK paused its rate-cutting cycle on Wednesday, keeping its benchmark lending rate at 8.75 percent to monitor second-round effects from a surge in global energy prices triggered by the Iran war.
The decision followed 10 consecutive rate cuts.
April inflation rose at the quickest pace in seven years to 5.6 percent from 4.4 percent as the global oil price shock hit home.
A further rise in fuel prices in May is seen pushing the change in consumer prices closer to the 7.5 percent ceiling.
“All indicators from fuel to consumer prices are showing that there is going to be a markup in the Central Bank Rate (CBR),” said Raimond Molenje, Kenya Bankers Association (KBA) chief executive officer.
“All eyes will be on CBK, and we expect pressure to raise the CBR as we look at rising inflation in the economy and a test on currency stability.”
Kenya’s inflation rate has climbed above the preferred mid-point of five percent, pointing to underlying consumer cost pressures, but the shilling has largely held steady, keeping within a narrow range of Sh129 and Sh130 against the US dollar.
A further escalation in inflation and/or volatility in the Kenya shilling could force CBK to react with an upward recalibration to the CBR. This would immediately lift the cost of borrowing as most banks have pegged pricing on the CBK benchmark rate.
Nearly three-quarters of banks snubbed use of the new risk-based pricing formula and instead adopted CBR as their pricing benchmark. An analysis of bank disclosures shows that 27 of 37 banks opted for the CBR as their key reference rate, with only a minority opting for the Kenya Shilling Overnight Interbank Average (Kesonia).
The adoption of the revised risk-based pricing model has created transparency while also aligning bank interest rates with the CBK benchmark, shortening the translation period between when CBK recalibrates the rate and when banks adopt it.
Commercial banks' interest rates have eased in line with the improved pricing metric and lower inflation.
Average lending rates eased slightly in March to 14.7 percent from 14.8 percent in February 2026.
Private sector credit growth continued to strengthen and reached 8.1 percent in March 2026 from 7.4 percent in February, and from a contraction of 2.9 percent in January 2025.
Banks, however, continued to struggle with asset quality, where the ratio of gross non-performing loans to gross loans climbed to 15.6 percent in March from 15.4 percent in December 2025.
A rise in the CBR is expected to impact not just borrowing costs but also private sector credit growth and non-performing loans, likely to make all three metrics worse.
KBA, however, says it is more worried about the health of the consumer, where a deterioration will dampen the demand for new loans faster and hasten the drop in industry asset quality.
“The biggest worry we have is on purchasing power in the economy because you could have an economy where borrowing rates are up, but people are consuming more,” added Mr Molenje.
“It’s not such a big hit when interest rates go up, but consumer demand is sustained. The challenge right now for government and policymakers is to ensure that prices don’t go up. The challenge is when items like fares go up, it’s very difficult for them to come down, even when oil prices are turned down.”
CBK had been on a rate-easing cycle from August of 2024 to April this year and has not raised the key benchmark rate since February 2024.
