Commercial banks expect borrowing costs to fall further even as the Central Bank of Kenya (CBK) is widely expected to hold the benchmark rate unchanged for a fourth time this week.
The projection which signals lower borrowing costs for customers is anchored on the continued fall of other domestic interest rates like Treasury bills which banks say reveal the less restrictive interest rate environment.
Average commercial bank lending rates have eased on a month-on-month basis to August 2026, despite a hold in the CBK benchmark lending rate since February this year.
The average bank lending rate sat at 14.34 percent in August from 14.78 percent in February, signalling the continued transmission of prior rate cuts by the apex bank.
“Domestically, Treasury bill yields have declined alongside monetary easing, while the government securities yield curve is pointing towards lower funding costs and a less restrictive interest rate environment,” said the Kenya Bankers Association (KBA) in a research note pre-empting CBK’s policy meeting (tomorrow) Wednesday.
“These developments are expected to lower expectations of an increase in funding and benchmark pricing costs, thereby creating scope for lending rates to continue declining in the near term. Consequently, improved affordability of credit should reinforce the recovery in credit growth.”
Banks have continued to pass on lower borrowing costs to businesses and households even after the pause in the Central Bank Rate (CBR), revealing continued policy transmission after the apex bank cut the key rate in 10 consecutive meetings to February 2026. The resulting lower borrowing costs have helped revive lending to the private sector to hit double-digit rates at 10.6 and 10.2 percent respectively in June and July 2026.
CBK is widely expected to leave its benchmark rate unchanged at 8.75 percent this week, maintaining a wait and see stance which has been in place since the onset of the new Middle East crisis which has rekindled inflationary concerns after stoking higher fuel prices.
Kenya’s inflation edged higher to 6.8 percent in September 2026 from 6.6 percent in August but remains within CBK’s target range of 2.5 to 7.5 percent, supporting the continuation of a wait and see stance. Extended stability in the Kenya shilling exchange rate between 129 and 130 units to the dollar is seen as an additional factor anchoring a hold in the policy rate.
Global central banks including the US Federal Reserve and the European Central Bank (ECB) have both recently raised rates as a mitigative response to supply-side inflationary pressures.
KBA however says the Kenya-US interest rate differential remains sizable, supporting the relative attractiveness of Shilling-denominated assets, thereby keeping the exchange rate stable.
CBK has previously suggested that commercial bank lending rates would be much lower if the Middle East crisis had not occurred, suggesting the apex bank would have further cut the benchmark rate below the current 8.75 percent.
The banking sector regulator had expected that banks would have fully implemented the revised risk-based loan pricing framework during a rate easing cycle which was instead posed by the new Middle East crisis.
“Unfortunately, we did not use this framework when we were easing because the crisis in the Middle East intervened. We are now in a wait-and-see situation,” Kamau Thugge, the CBK Governor, told a central bank governors symposium last month.
Despite rebounding inflationary pressures, short-term interest rates have remained relatively unchanged, pointing to optimal funding and liquidity conditions in the money markets. Treasury bill rates have only risen marginally since the start of the Middle East conflict with the 364-day Treasury bill peaking at 9.0397 percent as of last week from 8.7893 percent at the end of February 2026.
