The fallout from the Middle East crisis is frustrating efforts to lower the cost of loans, the Central Bank of Kenya(CBK) has said, citing a resurgence in inflation which has forced it to pause interest rate reductions.
CBK Governor Kamau Thugge said the apex bank is unable to fully implement a new risk-based pricing framework that seeks to lower borrowing costs.
“Unfortunately, we did not get to use this framework when we were easing because the crisis in the Middle East intervened,” he told a forum in Nairobi on Thursday.
The apex bank had cut its benchmark rate at 10 consecutive policy-setting meetings from 13 percent in August 2024 to 8.75 percent in February before the emergence of the new Middle East conflict interrupted the cycle.
CBK has since held the rate unchanged at three consecutive policy-setting meetings up to August 2026 as it assesses inflation, which has been impacted mostly by higher fuel costs.
Dr Thugge said he had hoped the new loan pricing model, which has the Central Bank Rate (CBR) and the interbank rate as dual benchmarks for loans to businesses and households, would trigger deeper cuts to commercial bank lending rates.
The revised risk-based pricing model mandates banks to use either the Kenya shilling overnight interbank rate (Kesonia) or the CBR as the pricing benchmarks for loans, before adding a premium to cover costs and profit.
Kesonia is also pegged to the CBR, within a corridor of plus or minus 0.5 percentage points, helping align the two rates for predictability of lending rates and effective transmission of monetary policy.
The CBK had previously deemed inflation from the Middle East crisis a passing cloud and expected a reduction in the cost of living.
Inflation has nevertheless proved stubborn for major world economies, with both the US Federal Reserve and the European Central Bank raising rates this past week to contain re-emerging inflationary risks.
The CBK’s wait-and-see stance has been anchored on inflation remaining within the government’s target band of 2.5percent to 7.5 percent, where it is seen remaining through August 2027.
Inflation rose in August for a second straight month to 6.6 percent from 6.5 percent in July but remained below the upper target band.
The hold has found further support from the continued exchange rate stability as the Kenyan shilling remains largely unchanged against the US dollar, where it has traded in a narrow-bound range of between 129 and 130 units since the onset of the Middle East crisis.
This is even as Kenya’s official foreign currency reserves come under pressure from an increased fuel import bill and reduced diaspora remittances.
Lending to businesses and households (private sector lending) has also remained robust, climbing back to double-digit levels in the months of June and July 2026 for the first time since February 2024.
The average lending rate by commercial banks stood at 14.3 percent in July, falling from 14.4 percent in June and 17.2 percent in November 2025.
The ease in lending rates has continued despite the pause in monetary policy, revealing the continued transmission of previous cuts into the economy.
The apex bank has credited the new loan-pricing and monetary policy framework for bringing down lending costs.
CBK, however, acknowledges that banks were initially resistant to the changes as they bickered over the choice to adopt the CBR or the Kesonia as the benchmark for pricing loans.
Most banks in the end favoured the CBR over Kesonia, but both rates have since converged as the CBK exercises its other open market operations tool to prop liquidity in the interbank market, keeping the overnight lending rate close to the CBR.
The CBK has an established interest rate corridor where the interbank rate, or Kesonia, hovers at no more than 0.5 percentage points above or below the CBR.
“Our original proposal was to have the CBR as the benchmark, but banks complained, saying that we were trying to control interest rates. We allowed them to do so, but today the interbank rate is the same as the policy rate. We are okay with whichever benchmark a bank chooses because this framework has ensured that both the policy rate and Kesonia move in tandem,” Thugge added.
