The Central Bank of Kenya (CBK) has revised its inflation forecast, expecting a peak of 6.8% in January 2027, down from an earlier projection of 7.2%, contingent on a de-escalation of the Middle East conflict.

CBK Governor Kamau Thugge highlighted that lower inflation would provide some relief to Kenyan businesses and households after months of elevated costs, especially in fuel and transport sectors.

Oil Prices Remain Critical

Kenya’s heavy reliance on imported petroleum exposes the economy to fluctuations in global oil prices. The CBK’s baseline assumes crude oil averaging around $90 per barrel. If prices drop to $70, inflation could ease more rapidly. Conversely, sustained conflict pushing oil above $110 per barrel could drive inflation to 8%, surpassing the bank’s upper target limit of 7.5%.

Impact on Businesses and Households

  • Businesses: Lower fuel costs would reduce transport and logistics expenses, easing pressure on profit margins and enabling better planning for pricing and investments.
  • Households: A slowdown in inflation means prices may rise more slowly, potentially freeing up household budgets for essentials, though prices are unlikely to fall outright.

July’s inflation rose slightly to 6.5%, driven by transport and food costs, underscoring the sensitivity of the economy to energy prices. A sudden fuel price hike could increase delivery costs and reduce consumer demand.

Monetary Policy and External Accounts

The CBK has maintained the Central Bank Rate at 8.75%, aiming to anchor inflation expectations and stabilize the exchange rate. However, ongoing oil price volatility could complicate this balance.

Kenya’s current-account deficit widened to 3% of GDP by June 2026, influenced by a larger trade deficit, lower remittances, and costly petroleum imports. The CBK expects this gap to be covered by capital inflows, keeping the overall balance of payments positive.

Outlook

The inflation trajectory depends heavily on global developments. An easing of Middle East tensions and falling oil prices would ease cost pressures domestically. In contrast, prolonged conflict and rising crude prices would exacerbate inflationary challenges, affecting both consumers and businesses.

While the CBK’s forecast offers cautious optimism, the central message is clear: Kenya’s inflation outlook remains vulnerable to external shocks, with oil prices being a pivotal factor.