The Central Bank has cut Kenya’s economic growth
projection for 2026 by 40 basis points, on account of rising global fuel prices due to the ongoing war in the Middle East.
Addressing journalists at a post Monetary Policy Committee (MPC) briefing on Wednesday, Central Bank of Kenya boss, Kamau Thugge, said the economy is expected to expand by 4.9 per cent compared to an earlier projection of 5.3 per cent.
“This
outlook is subject to risks, particularly a prolonged conflict in the Middle
East, and elevated trade policy uncertainties,’’ Thugge said.
According
to him, the conflict in the Middle East has disrupted global supply chains and
led to a sharp increase in energy prices and transportation costs, resulting in
higher inflation and moderated global growth prospects.
“This
is a global phenomenon. World’s growth is
projected at 3.1 per cent in 2026, down from 3.4 per cent in 2025, due to the effects of higher inflation and reduced demand arising from higher energy prices
and elevated uncertainties.”
He added that elevated trade policy uncertainty and the Russia-Ukraine conflict remain key risks to growth.
The
growth of the Kenyan economy moderated to 4.6 per cent in 2025 from 4.7 per cent
in 2024, due to a slowdown in the growth of the agriculture and services sectors.
However,
growth in the industrial sector recovered strongly, supported by construction.
Leading indicators of economic activity point to resilient performance in the
first quarter of 2026.
The Central
Bank has also asked Kenyans to tighten their belts as it expects inflation to
keep rising due to oil price shocks.
He
said that this is a global trend, with inflation expected to increase to 4.4
per cent in 2026 from 4.1 per cent in 2025 on account of higher energy prices
and transport costs attributed to supply chain disruptions from the Middle East
crisis.
He
noted that inflation rates in most major economies have increased and remained above
their respective targets in recent months, due to elevated energy prices
and stickiness in core inflation.
To
soften this, central banks in the major economies have remained cautious and
kept their policy rates unchanged as they continue to assess the impact of the conflict
in the Middle East on their inflation and growth outlooks.
He
revealed that this was the major reason why the MPC held Kenya’s base lending
rate at 8.75 per cent.
“This
is appropriate to ensure that inflation expectations remain anchored within the
target range, and the exchange rate remains stable.”
The
country’s overall inflation increased to 6.7 per cent in May 2026 from 5.6 per cent
in April due to higher energy prices arising from the elevated global oil
prices, but remained within the target range of 5±2.5 percent.
Core
inflation rose to 3.2 per cent in May from 2.8 per cent in April, mainly driven
by higher inflation for transport items, arising from higher fuel prices.
Processed
food inflation remained relatively stable, supported by lower prices of sugar
and maize products.
Non-core
inflation increased sharply to 16 per cent in May from 13.4 per cent in April,
on account of higher energy prices, particularly fuel and gas prices.
Additionally,
prices of some vegetables, particularly tomatoes and cabbage, remained
elevated.
Thugge
said that 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.
“This
will be supported by: appropriate monetary policy actions; 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.”
According
to CBK, the majority of respondents to the May 2026 Agriculture Survey expect some
upward pressure on inflation in the near term, mainly due to higher energy
prices arising from elevated international oil prices attributed to the
conflict in the Middle East.
However,
respondents expect inflation to remain within the target range in the near
term, supported by stable food prices attributed to favourable weather
conditions, and stability in the exchange rate.
The
CEOs Survey and Market Perceptions Survey conducted in March 2026 revealed
sustained optimism about business activity and economic growth prospects for
the next 12 months.
The
optimism was attributed to expected favourable weather conditions, which are
expected to support agriculture, increased infrastructure spending, increased
digital innovations, a stable exchange rate, and improved private sector credit
growth.
“Nevertheless,
the optimism was moderated by concerns about increased global uncertainties
attributed to the conflict in the Middle East, high cost of doing business,
inflationary pressures, and low consumer demand.”
The
current account deficit is estimated at 2.6 per cent of GDP in the 12 months to
April 2026, compared to 1.7 per cent of GDP in a similar period in 2025, due to
a higher trade deficit, and lower services and secondary income transfers as a
share of GDP.
Goods exports increased by 4.2 per cent, driven by horticulture, tea, coffee, food, and machinery and transport equipment. Imports increased by 8.5 percent, reflecting higher imports of food, intermediate and capital goods and mineral fuels.
The
deficit is projected at three per cent of GDP in 2026 compared to 2.1 per cent
of GDP in 2025, reflecting the higher international oil prices, lower receipts
from services, slower growth in remittance inflows, and reduced exports.
