Assessing the Scope for Monetary Policy Easing in Kenya: Balancing Price Stability with Output Growth
Abstract
This study assesses whether Kenya's macroeconomic, financial, operational and institutional conditions justify a resumption of the monetary policy easing cycle that the Central Bank of Kenya (CBK) paused in April 2026, or whether the balance of risks now favours a more cautious stance, following ten consecutive policy-rate cuts between August 2024 and February 2026. The study is motivated by a distinctive feature of Kenya's recent experience: unlike many disinflating emerging markets that are still deciding when to begin easing, Kenya has already delivered a cumulative 425-basis-point reduction in the Central Bank Rate (CBR), from 13.00 per cent to 8.75 per cent, and must now determine whether that cycle should resume, pause indefinitely, or partially reverse in the face of an external, oil-price-driven inflation shock linked to the conflict in the Middle East. Drawing on the New Keynesian framework, monetary policy transmission theory, credibility-based monetary models and the literature on policy normalization and reversal, the paper develops an integrated framework for evaluating Kenya's easing-readiness under upside inflation risk. The analysis combines stylized macroeconomic evidence, cross-country experience of policy pauses and reversals, Taylor-rule diagnostics, transmission assessments and calibrated counterfactual policy simulations anchored to the August 2026 Monetary Policy Committee (MPC) decision cycle. The results suggest that although Kenya's disinflation and stabilization gains between 2023 and early 2026 were substantial and transmission has strengthened considerably, headline inflation's climb from 4.3 per cent in February 2026 to 6.5 per cent in July 2026, against a target mid-point of 5 per cent, means that the conditions for resuming rate cuts are not currently met, while an outright reversal is not yet warranted either. The paper recommends a three-stage sequence: an extended, data-dependent pause accompanied by targeted liquidity and operational reforms; explicit state-contingent triggers for resuming easing or for a modest pre-emptive tightening; and enhanced communication to protect the substantial credibility gains achieved since 2024.