Will Rising Inflation Force the CBK to Raise Interest Rates?

For more than a year, the Central Bank of Kenya was on a steady easing cycle, cutting the interest rate from 13% at the start of 2024 to 8.75% in a bid to revive private sector credit growth. Then, in April, it paused, keeping the rate unchanged at 8.75%. The easing cycle had worked gradually: private sector credit growth recovered from negative territory to 8.1% in March 2026, marking its thirteenth consecutive month of expansion. Even so, Kenya has yet to return to double digit credit growth since February 2024, when it stood at 10.3%.

Governor Kamau Thugge still wants credit growth to reach double digits but not at the expense of prices and exchange rate stability. At the last MPC meeting, he noted: “We still believe there is more room for credit expansion and believe we should be able to get to double digits, but now have to watch what is happening with inflation and the exchange rate.”

That balancing act has become more difficult. Inflation rose to 6.7% in May from 5.6% in April, driven largely by non-core inflation (volatile items like food and fuel prices)which surged to 16%. Core inflation(stable items like education,health services) which provides a clearer picture of underlying demand pressures, also edged up to 3.2%, suggesting the “second round effects from higher transport costs” that Thugge had warned about may be beginning to emerge.
The external position, however, remains supportive. Foreign exchange reserves stood at USD 13.2 billion on June 4, equivalent to 5.6 months of import cover and comfortably above the statutory four month minimum.

The decision will ultimately come down to whether the CBK views the recent inflation increase as a temporary shock or the start of broader price pressures. Policymakers still want private sector credit growth to return to double digits, but rising non-core(volatile items like food and fuel) inflation and signs of spillover into core(stable items like education,health services) inflation complicate that goal.

Holding rates steady would give the CBK more time to assess the inflation outlook while avoiding a premature tightening that could slow credit growth and economic activity. The challenge is finding the right balance between supporting growth and preserving price stability