Commercial banks have called on the Central Bank of Kenya (CBK) to hold its base rate at 8.75 percent in Wednesday’s Monetary Policy Committee (MPC) meeting, citing rising global risks from the Iran war that have increased pressure on inflation and the exchange rate.
Through the Kenya Bankers Association (KBA), the lenders said that while headline inflation remained within the CBK’s preferred range of five percent plus or minus 2.5 percentage points, forward looking projections point to escalation risks from pass-through effects of higher oil prices and disruptions on trade channels and supply routes in the Middle East.
Further, they are concerned about headwinds for diaspora remittances arising from the disruptions in the Middle East, where Saudi Arabia and the United Arab Emirates (UAE) remain a key source of flows.
“Although global commodity markets remain broadly stable, the external price dynamics going forward may present moderate inflation risks, from geopolitical conflicts, trade policy shifts and continuing tariff adjustments among major economies,” said the KBA in a note ahead of the MPC meeting.
“Going forward, exchange rate stability remains under threat on geopolitical tensions and escalation of conflicts, energy price shocks, and trade disruptions, which heighten volatility and intensify depreciation pressures.”
This is the second successive time that the banks have called for a pause in the CBK’s recent easing actions, having argued for a hold at nine percent before the February 2026 MPC meeting.
In that instance, they cited a need to allow the full transmission of the previous base rate cuts, and a non-disruptive transition of their existing loan portfolios to the revised risk-based pricing framework, which was scheduled to complete by end February.
During the February 10 meeting, the MPC’s main consideration in making the 10th straight central bank rate (CBR) cut was stimulating lending by banks to the private sector and supporting economic activity.
The rate cut was made against the backdrop of a prolonged stability of the exchange rate at the shilling at the 129 level against the US dollar, and falling inflation that was expected to remain anchored due to the onset of the rainy season.
However, this outlook has now been clouded by the events in the Middle East, where the US and Israel launched attacks on Iran on February 28, provoking retaliatory strikes and a partial closure of the key Strait of Hormuz that carries about a quarter of the world’s daily oil and gas shipments.
As a result, global benchmark oil prices have jumped by between 50 and 60 percent since the onset of the conflict, with the price of UAE Murban Oil (which informs Kenya’s pump pricing) rising to $118 a barrel from $70 on February 27, and Brent Oil going up to $110 from $72 a barrel.
Kenya’s next price review on April 14 is therefore expected to reflect the higher prices of the commodity.
Besides raising costs for motorists, a surge in pump prices in Kenya would have a wide impact on household budgets due to the pass-through effect of transport charges on the prices of basic goods, and higher electricity prices due to the thermal power component on monthly bills.
Investment banks have also predicted a hold on the base rate due to these concerns about inflation and the exchange rate. In pre-MPC notes, NCBA Investment Bank and Sterling Capital said that the elevated inflation risks have made central banks more cautious on policy, in contrast to the easing stance they had adopted earlier in the year.
The analysts at NCBA added that even if the government intervenes in the fuel market through subsidies, current fiscal pressures point to only a partial and short-lived reprieve that is likely to be skewed toward diesel.
“Overall, we forecast a gradual increase in inflation to a range of five to six percent in May and June,” said the NCBA analysts.
They also predicted that the central bank will likely increase the cash reserve ratio for banks to sustainably manage liquidity, which has remained elevated in recent months despite CBK efforts to mop up through instruments such as repurchase agreements.
High liquidity presents an inflationary risk if not addressed, since it can result in too much money chasing a few goods.
