Kenya's inflation rate has hit a two-year low thanks to the strong performance of its currency.

The Kenya National Bureau of Statistics reveals that consumer prices rose by 5.7% in March. This was a decrease from the 6.3% recorded in the previous month.

Economists surveyed by Bloomberg had estimated a slightly higher price hike rate of 6.1%.

The Kenyan shilling, now the world’s best currency, is driving this positive shift.

The shilling has consistently performed well in the global currency markets in the past few weeks.

Despite a four-year trend of depreciation against the US dollar, the shilling began to reverse its decline last month.

The Kenyan shilling has now risen to the ranks of the top-performing currencies of 2024 monitored by Bloomberg.

As a result of the strengthening shilling, Kenya is now enjoying cheaper imports, leading to reduced inflation rates.

Strong Investor Confidence

The shilling's remarkable gain in value is nearly 19%.  Several factors have contributed to this trend, including the new euro bond, which injected fresh foreign investor confidence into the country.

Further, the Kenyan Treasury made two consecutive interest rate hikes in December and February, totaling a 250-basis-point increase. This has helped to control inflation and make the shilling stronger.

The positive trend of the shilling has important implications for the country’s monetary policy.

With Kenya’s inflation slowing and the currency's value steadily rising, the central bank may opt to maintain the key interest rate at its current level of 13%.

This rate, at almost a 12-year high, aims to ensure that inflation continues to ease towards the target 5%.

KES: USD Future Projections

Kenya's economic landscape is showing signs of stability and resilience, largely driven by the impressive performance of its currency.

As the shilling continues to strengthen and inflation remains in check, policymakers are poised to make decisions that will sustain this positive momentum and support the country's economic growth trajectory.

NCBA Managing Director and CEO John Gachora predicts a slight drop in the shilling's value.

Recent data from the Central Bank of Kenya shows the shilling trading at KSh 132.32 per US dollar on March 29.

Gachora believes the true value of the Kenyan shilling lies between its current rate and its historic low of KSh160 per USD. 

He suggests, "It's somewhere in the middle."

Is the Shilling's Value In Line With Market Trends?

According to Gachora, the current exchange rate doesn't match market trends. He attributes the fluctuation to the influx of foreign currency through infrastructure bonds, a viewpoint shared by many experts.

Gachora dismisses the idea that increased dollar supply is driving the shilling's growth.

He warns of a forthcoming surge in demand, likely bringing the shilling's value back down.

Gachora emphasizes the cyclical nature of currency trading and anticipates a return to what he considers the shilling's true value.

Low Forex Reserves

Even as the shilling strengthens, Kenya's foreign exchange reserves have dipped below $7 billion. 

Central Bank of Kenya data shows reserves at USD 6,919 million as of March 30, below the preferred $7.41 billion threshold.

This decline signals weaker support for the currency at home. It may strain the dollar supply, potentially leading to shilling depreciation.

Foreign reserves act as a safety net for a country’s economy. Kenya’s target is to keep it at no less than four months' worth of imports. 

Falling below this level indicates potential challenges in ensuring long-term economic stability.