Kenya's monetary authority opted on Wednesday to maintain its benchmark interest rate at 8.75%, effectively pausing an easing cycle that has been in place for nearly two years. The pause reflects policymakers' caution as they assess the ripple effects of the US-Israeli war on Iran across global markets and domestic prices.
Governor Kamau Thugge framed the decision as consistent with market expectations and directly related to concerns about disruptions emanating from the Middle East. "The conflict in the Middle East has disrupted global supply chains, leading to significantly higher energy prices and heightened risks to the global economic outlook," Thugge said in a statement.
Despite the hold on rates, Kenya's inflation rate was recorded at 4.4% in March, which sits below the central bank's 5% midpoint target. Nevertheless, the bank's broader target range of 2.5% to 7.5% faces potential upward pressure, with officials pointing to increased fuel and food costs linked to the Iran war as the main channels of concern.
Thugge also noted that central banks in major economies have similarly kept policy rates unchanged as they gauge how the conflict will influence inflation and growth. That global pause in immediate action has informed Nairobi's decision to hold steady for now while uncertainties persist.
External analysts cautioned that the shock from the conflict could complicate Kenya's monetary and foreign-exchange policy mix. Gergely Urmossy, an emerging-markets strategist at Societe Generale, said a prolonged shock might force the central bank to reassess its approach to FX management because forward contracts have surged in response to heightened risk perceptions. "The central bank must assess whether it can continue its rate-cutting cycle without undermining FX stability as external risks remain asymmetric," Urmossy said in a note to clients. He expects no change to Kenya's policy rate until the fourth quarter.
Market indicators show strains in the currency market: the Kenyan shilling moved past the 130-per-dollar mark this month for the first time since November, although the currency has weakened by only 0.7% so far this year. Foreign-exchange reserves were reported at $13.7 billion at the start of April, a level the central bank says is adequate to cover nearly six months of imports and remains above a four-month threshold. The reserves have been supported by farm export receipts and remittance inflows.
Policymakers have therefore opted for a cautious stance - preserving the current policy rate while monitoring how energy-driven inflationary pressures and FX developments evolve in the coming months.