Financial analyst Chris Muiga has termed the Central Bank of Kenya’s decision to raise its benchmark interest rate by 50 basis points to 10.5% as a bold yet necessary step in the face of growing economic pressures. The Monetary Policy Committee (MPC), during its April meeting, cited persistent inflation and a volatile shilling as the primary reasons for tightening monetary policy.
Kenya’s annual inflation rate climbed to 7.2% in March 2025, surpassing the Central Bank’s target range of 5±2.5%. This surge has been largely driven by high food and energy prices, coupled with the impact of erratic rainfall that has affected crop production in key agricultural zones. Households across the country continue to feel the strain as basic commodities become more expensive, and purchasing power erodes.
According to Muiga, the rate hike is an attempt to restore price stability and protect the value of the shilling, which has depreciated significantly over the past year. The Kenyan shilling is currently trading at about KSh 158 to the US dollar, its weakest level in history. The depreciation has increased the cost of imports, notably fuel and industrial inputs, exacerbating inflationary pressure.
CBK’s decision also aims to attract more foreign capital inflows and reduce pressure on the country’s dwindling foreign exchange reserves. A higher benchmark rate makes Kenyan assets more attractive to investors, potentially supporting the currency in the medium term. Muiga noted that the Central Bank is operating in a difficult environment, as global interest rates remain high and external financing conditions continue to tighten.
However, the rate hike is expected to have broad implications for borrowers. Commercial banks are likely to raise lending rates in response, increasing the cost of credit for individuals and businesses. This could slow down private sector investment and consumption, particularly for small and medium-sized enterprises (SMEs) that are already grappling with tight liquidity.
Chris Muiga emphasized that while the hike may cause short-term discomfort, it sends a strong signal that the CBK is committed to preserving macroeconomic stability. He also highlighted the importance of complementary fiscal policies to address supply-side constraints and boost productivity, noting that monetary policy alone cannot solve structural economic problems such as food insecurity and trade imbalances.
Market reactions to the announcement have been mixed. Some investors see it as a necessary intervention to anchor inflation expectations, while others are concerned about its potential to dampen economic momentum. Bond yields have edged higher in response, reflecting growing investor appetite for returns in a tightening environment.
As the country braces for the impact of this monetary adjustment, all eyes will be on future economic data, including inflation trends, foreign exchange performance, and credit growth. The Central Bank has indicated that further rate decisions will be guided by the evolving domestic and global economic landscape.