The Central Bank of Kenya has trimmed its inflation peak projection by 40 basis points, signaling growing confidence that price pressures will ease faster than earlier expected.
Policymakers now expect inflation to top out at 6.8% in January 2027, down from the 7.2% peak the bank projected for February 2027 in its June outlook.
The revised path shows inflation easing further to 4.8% by August 2027. CBK projects the entire forecast trajectory will stay within its 2.5% to 7.5% target band, giving the Monetary Policy Committee confidence to hold its benchmark rate at 8.75% at its August 11 meeting, the third consecutive pause since February.
What is pulling the forecast lower
Three forces are driving the improved outlook. Government interventions in the fuel market, including subsidies and a temporary VAT reduction, have softened cost push pressure from energy prices. A stable exchange rate has curbed imported inflation. Favorable weather conditions have also supported food price stability, a critical factor given food’s heavy weighting in Kenya’s consumer basket.
The near term data backs the trend. Kenya’s headline inflation stood at 6.5% in July, edging up only slightly from 6.4% in June. Core inflation ticked up to 3.2% from 3.1%, while non-core inflation eased to 15.0% from 15.1%, helped by softer energy price inflation and government subsidies.
Risks that could still push the forecast higher
The Committee flagged that geopolitical tensions, spanning the Middle East conflict, the Russia-Ukraine war and broader trade tensions, remain elevated and continue to pose upside risks to the inflation outlook.
Potential El Niño related weather disruptions add another layer of uncertainty. Global inflation itself is expected to rise to 4.7% in 2026 from 4.1% in 2025, driven by higher energy and transport costs, with inflation in most major economies running above target due to sticky core inflation.
The Committee said it remains vigilant to second round effects that could broaden domestic price pressures beyond energy and food, even as it sees no immediate need for policy tightening.
Why the rate held alongside the lower forecast
The improved inflation trajectory gave the MPC room to extend its pause rather than adjust the Central Bank Rate. The Committee concluded that the current monetary policy stance, with the Central Bank Rate unchanged at 8.75 percent, remains appropriate to keep inflation expectations anchored within the target range and the exchange rate stable.
The decision also tracks a broader global pattern. The US Federal Reserve, European Central Bank, Bank of England and Bank of Japan have each held their policy rates in recent meetings as they assess similar energy price and geopolitical pressures on inflation and growth.
Supporting economic conditions
CBK projects overall economic growth to moderate to 4.9% in 2026 before recovering to 5.3% in 2027. High frequency indicators point to improving momentum, with the NCBA Consumer Activity Index showing household consumption up 4.2% in real terms in July and the headline PMI rising to 51.3 from 50.0 in June.
Credit conditions have strengthened as well. Private sector credit growth accelerated to 10.2% in July 2026, up from contractionary levels in early 2025, while the ratio of gross non-performing loans to gross loans fell to 14.6% in July from 15.4% in April.
Foreign exchange reserves remain a key buffer supporting the stable exchange rate assumption behind the lower inflation path. Reserves stood at US$15.2 billion in July, equivalent to 6.3 months of import cover, even as Kenya’s current account deficit widened to 3.0% of GDP from 1.9% in 2025 on the back of faster import growth.
A gradual easing of external pressures, particularly around global energy prices and geopolitical tension, would help lock in the lower inflation trajectory and preserve the conditions supporting it. The MPC will meet again in October 2026.
