Key insights
- The Central Bank of Kenya held its rate at 8.75% due to concerns about the Middle East conflict's impact on global supply chains and energy prices. While Kenyan inflation is currently within target, rising fuel and food prices pose a risk. The Kenyan shilling has weakened, and the central bank may need to adjust its FX strategy if the conflict persists. This highlights the interconnectedness of global events and potential inflationary pressures, indirectly influencing US market sentiment.
Investing.com -- Kenya’s central bank maintained its benchmark interest rate at 8.75% on Wednesday, pausing an easing cycle that lasted nearly two years as policymakers assess the economic impact of the US-Israeli war on Iran.
Governor Kamau Thugge said the decision aligns with market expectations and reflects concerns about disrupted global supply chains and rising energy prices stemming from the Middle East conflict.
"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.
Kenya’s inflation stood at 4.4% in March, below the central bank’s 5% midpoint target. However, the bank’s 2.5%-7.5% target range faces pressure from rising fuel and food prices linked to the Iran war.
Thugge noted that central banks in major economies have kept policy rates unchanged while evaluating the conflict’s impact on inflation and growth.
Gergely Urmossy, an emerging-markets strategist at Societe Generale, said a prolonged shock from the conflict could force Kenya’s central bank to adjust its foreign-exchange strategy as forward contracts have spiked.
"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.
The Kenyan shilling breached the 130 level against the dollar this month for the first time since November, though it has weakened just 0.7% this year. Foreign-exchange reserves stood at $13.7 billion at the start of April, sufficient for nearly six months of imports and above the four-month threshold. The reserves benefited from farm export inflows and remittances.
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