Kenya's monetary authority left its key lending rate unchanged at 8.75% on Tuesday, marking the second consecutive meeting in which officials opted not to adjust borrowing costs while they evaluate the economic implications of the ongoing Iran conflict.
The move was in line with expectations - all six economists surveyed by Bloomberg had forecast no change. Governor Kamau Thugge framed the decision around external pressures, saying the Middle East conflict has disrupted global supply chains and driven a sharp rise in energy and transportation costs, with consequences for inflation and global growth.
Data released for May show headline annual inflation in Kenya increasing to 6.7% from 5.6% in April, a jump the central bank attributes largely to higher fuel prices. Core inflation, which strips out volatile items, rose to 3.2% in May from 2.8% the month before, illustrating secondary price effects related to higher gasoline costs. Taken together, price growth now sits toward the top of the bank's 2.5% to 7.5% inflation target range.
Fuel price dynamics have been pronounced. Since the onset of the conflict, diesel prices in Kenya have climbed by 40% and gasoline has risen about 20%, developments that have helped spark public protests with at least 12 reported fatalities.
Officials signaled that inflation is likely to breach the central bank's target band and could reach a three-year high if current trends persist. Despite the inflationary pressures, the Kenyan shilling has been broadly stable against the U.S. dollar, and foreign-exchange reserves remain at a level sufficient to cover almost six months of imports.
The U.S.-Israeli war on Iran has prompted other emerging-market central banks - including those in Indonesia, Turkey and South Africa - to either pause or roll back easing cycles, as higher oil prices and currency strains feed through to inflation. In Kenya's case, the central bank had previously reduced borrowing costs at 10 consecutive meetings, cutting the policy rate by a total of 425 basis points prior to the April hold.
Context for markets and policy
The decision to maintain the policy rate reflects a balance between containing inflationary pressures linked to external energy shocks and guarding against tightening too quickly in the face of slower global growth. The rise in core inflation suggests that some pass-through from fuel to broader prices is underway, which can complicate the outlook for monetary policy.