Uncertainty over the ongoing US-Israel war with Iran placed the Central Bank of Kenya (CBK) policy maneuvers on ice, with the apex bank keeping its benchmark rate unchanged at 8.75 percent for a second consecutive round.
The CBK sees the higher inflation emanating from the war as transitory, even as it assesses other macroeconomic factors, including food prices and the exchange rate, as stable. The apex bank does not expect the inflation rate to breach the 7.5 percent ceiling over the next 12 months but is banking on a near-term de-escalation in the Middle East for its softer inflation outlook to hold.
“The decision on whether to tighten or ease monetary policy is based on the data we receive during the monetary policy committee (MPC) meeting,” CBK Governor Kamau Thugge said on Wednesday.
“At this stage, it’s difficult to say what will happen. We have to wait and see the developments. These hostilities could seize very quickly.”
CBK’s core mandate entails maintaining price stability in the economy and has a set inflation target ranging from 2.5 percent to 7.5 percent.
The relatively softer inflation outlook implies that the CBK will be unlikely to raise its benchmark lending rate from the current 8.75 percent as inflationary pressures from higher fuel prices are seen to be a passing cloud.
The CBK has nevertheless maintained that it is data-dependent, implying that a higher headline inflation would climb above 7.5 percent or a rise in core inflation, which measures changes in non-food/non-fuel commodities, could warrant a change in stance.
Kenya’s inflation raced to its highest level in 28 months to print 6.7 percent in May from 5.6 percent in April on account of higher energy prices, particularly fuel and gas prices, even as some food commodities like tomatoes and cabbages registered greater sticker prices.
Non-food/non-fuel inflation or core inflation rose to 3.2 percent from 2.8 percent in the same period, mostly on higher transport costs.
CBK targets three percent and below as the sweet spot for core inflation.
Improved weather conditions are expected to cancel out further food price escalations in the coming months, anchoring CBK’s expectations, which are further complemented by a stable exchange rate.
The Kenya shilling has traded in a narrow-bound range against the US dollar, between 129 and 13 units to the greenback, providing a major offset to inflation concerns.
Kenya’s inflation is expected to rise to 7.2 percent by February 2027 but hold below the ceiling of 7.5 percent through June next year if the US-Israel-Iran conflict reaches a quick resolution.
“Overall inflation is expected to remain within the target range in the near-term, assuming a de-escalation of the conflict in the Middle East, and supported by appropriate monetary policy action, government interventions including subsidies and temporary reduction of VAT on fuel, expected stability in food prices due to favourable weather conditions and a stable exchange rate,” Thugge added.
The CBK will have its next MPC meeting in early August but usually stands ready to meet in the interim outside of its schedule if macroeconomic conditions require it to.
