MPs warn of fresh cost of living crisis as inflation climbs to 7.3%

Kenya's economic recovery is facing fresh questions as the rising cost of fuel, mounting bank loan defaults and persistently expensive credit threaten to put further pressure on households and businesses. MPs have warned that the combination of these challenges could deepen financial hardship, with inflation reaching 7.3 per cent in October 2026 and the value of unpaid loans climbing to Sh688.2 billion.

The National Assembly's Finance Committee says the latest economic indicators point to growing difficulties for consumers and businesses, warning that continued increases in energy prices could trigger another wave of price increases across essential goods and services.

In its assessment of the economy, the committee linked the inflation rise largely to disruptions in global oil supplies and tensions in the Middle East, which have pushed up energy costs.

Committee chairperson Kuria Kimani told the National Assembly that inflation had followed an upward trend throughout the year, rising from 4.5 per cent in December 2025 to 6.4 per cent in June 2026.

The rate climbed to 6.6 per cent in August, increased to 6.8 per cent in September and reached approximately 7.3 per cent in October.

Kimani warned that the effects of higher energy prices could spread through the economy as transporters and manufacturers pass increased costs on to consumers.

“There is therefore a need for continued monitoring of both direct and second-round inflationary effects, particularly the extent to which higher energy and transport costs are transmitted to food prices and other essential commodities,” he said.

The committee cautioned that households could face higher transport fares and food bills, while businesses may be forced to spend more on production and distribution. Such increases could leave families with less disposable income and weaken the ability of borrowers to service their loans.

The lawmakers also drew attention to the growing value of loans that banks have been unable to recover, despite a decline in the proportion of bad loans against total lending.

Data presented to the committee showed that non-performing loans increased from Sh674.4 billion in December 2025 to Sh688.2 billion in June 2026.

The ratio of non-performing loans to total lending, however, improved from 15.4 per cent to 14.8 per cent over the same period. It dropped further to approximately 13.9 per cent in September, according to an update by Central Bank of Kenya Governor Kamau Thugge during his engagement with the committee.

Despite the improving ratio, MPs said the increase in the actual amount of unpaid credit remained worrying, particularly as rising operational expenses continue to weigh on businesses and individual borrowers.

The committee also questioned whether reductions in the Central Bank's benchmark interest rate had resulted in affordable loans for Kenyans.

The CBK lowered its benchmark rate by 425 basis points, from 13 per cent in August 2024 to 8.75 per cent in February 2026. However, commercial banks have been slow to pass the reductions to their customers.

Average lending rates declined marginally from 14.8 per cent in December 2025 to 14.4 per cent in June 2026, leaving borrowing costs relatively high for small enterprises, informal traders and entrepreneurs.

The MPs said the effectiveness of monetary policy should be assessed by examining whether ordinary borrowers and businesses were benefiting from cheaper credit rather than relying solely on changes to the benchmark rate.

However, budget experts have identified the government's increased domestic borrowing as one of the factors limiting private sector access to financing.

The Parliamentary Budget Office warned that public borrowing needed to be controlled to prevent the government from taking up funds that would otherwise be available to businesses.

It called for “careful management of domestic government borrowing to avoid crowding out private investment”.

Manufacturing was particularly affected by the tightening credit environment, with loans to the sector declining by 5.4 per cent by June 2026.

The contraction came at a time when other key sectors were recording increased access to financing. Lending to agriculture expanded by 35.1 per cent, while trade registered growth of 22.6 per cent and building and construction increased by 29 per cent.

The committee said the decline in manufacturing credit was a concern because of the industry's contribution to employment, industrial development and export growth.

It further warned that competition between the government and private businesses for domestic financing could make it increasingly difficult for companies to obtain the funds needed to expand their operations.

Beyond the domestic economic challenges, MPs raised concerns over declining diaspora remittances and a widening current account deficit, warning that the two developments could leave Kenya vulnerable to external economic shocks.

The committee also pointed to the approaching General Election as another potential source of uncertainty, saying businesses could put investment plans on hold as they assess the political environment.

Meanwhile, concerns over the country's debt obligations have added to questions about the government's ability to finance public services while meeting its repayment commitments.

Diana Gichengo of The Institute of Social Accountability said Kenya was facing difficult choices as it prepares to repay Sh2.5 trillion in debt.

Speaking at a media sector forum in Nairobi on Wednesday, Gichengo cited inadequate disbursement of school capitation funds and delays in transferring money to county governments as examples of the pressure facing public finances.

Her concerns point to the growing challenge of balancing debt repayments with the need to maintain funding for essential services, including education and county government operations.

The committee's assessment paints a difficult picture for the economy, with rising consumer prices, increasing loan defaults, limited access to affordable credit and uncertainty over future investments emerging as major concerns.