Central Bank warns Middle East conflict could reignite inflation

The banking regulator has warned that rising tensions in the Middle East could push inflation up again and make it harder to maintain stable prices ahead of the next interest rate decision.

The Central Bank of Kenya (CBK), in its weekly bulletin for the period that ended on March 5, pointed to soaring international oil prices and heightened geopolitical tensions as key risks to the domestic economy, just weeks before its Monetary Policy Committee (MPC) meet which is due in April.

“International oil prices increased during the week, reflecting the escalation of the Middle East conflict, which disrupted supply chains,” the CBK said in the bulletin published on Friday. “Murban crude oil traded at $76.25 (Sh9,836) per barrel on March 5, compared to $69.73 per barrel (Sh9,014) in February 26.”

The near 10 per cent jump in crude prices over a single week underscores the vulnerability of import-dependent economies like Kenya to external shocks. The conflict, which erupted on February 28, has sent shockwaves through global energy markets, with Brent crude and also the Kenya preferred Murban crude surging above $119 (Sh15,384) per barrel, a 30 per cent increase at its peak, and triggering mass flight cancellations and rerouting that is further straining fuel supplies.

 “Inflation concerns increased in the week ending on March 5, mainly due to the escalation of the Middle East conflict,” the CBK stated, marking a clear shift in tone from the Central Bank’s previous communications which had focused on stable prices and room for monetary easing.

 The warning comes as a sharp reversal of fortune for President William Ruto administration, which had been banking on a period of sustained economic stability as the country heads into the 2027 election cycle. The CBK had cut its benchmark lending rate to 8.75 per cent in February, the tenth consecutive reduction since August 2024 – on the back of contained inflation and a stable shilling.  That February 10 MPC decision, which narrowed the interest rate corridor around the Central Bank Rate to ±50 basis points, was designed to “stimulate lending by banks to the private sector and supporting economic activity, while ensuring inflationary expectations remain firmly anchored.”

 Those expectations are now under threat. The CBK noted that yields on Kenya’s Eurobonds increased by 51.41 basis points on average during the week, mirroring broader emerging market jitters. Yields for regional peers Angola and Côte d’Ivoire also rose, the bank said.

 The inflationary shock could not come at a worse time. Data from the Kenya National Bureau of Statistics released on February 27 showed annual consumer price inflation at 4.3 per cent in February, comfortably within the CBK’s 2.5 to 7.5 per cent target range. Food and non-alcoholic beverages, which account for nearly a third of the Consumer Price Index (CPI) basket, rose to 7.3 per cent over the year, while transport costs increased to four per cent.

 But those figures predate the full impact of the oil price surge. Jet fuel prices are rising even faster than crude, compounding pressure on airlines already grappling with rerouted flights. More than 37,000 flights to and from the Middle East have been cancelled since the conflict began, forcing carriers to burn additional fuel on longer corridors.

 The geopolitical calculus darkened further this week when Iran’s Revolutionary Guard Corps warned that ongoing US and Israeli strikes on Iranian energy infrastructure could send global oil prices above $200 (Sh25,856) per barrel. IRGC spokesperson Ebrahim Zulfikari called on Islamic countries to pressure Washington and Tel Aviv to halt the attacks, warning that continued escalation would have “severe consequences for global energy markets.”

 Deutsche Bank has warned that without near-term relief, airlines worldwide could be forced to ground thousands of aircraft, with financially weaker carriers at risk of halting operations entirely.

For Kenya, a prolonged oil shock threatens not just inflation expectations but also the current account, which the CBK estimates widened to 2.4 per cent of GDP in 2025. The CBK’s foreign exchange reserves stood at a comfortable $14.597 million as of March 5, equivalent to 6.2 months of import cover – well above the statutory requirement. But reserves alone cannot insulate the economy from sustained energy price inflation.