The authorities’ immediate answer is an inflation targeting regime with an independent central bank including a Monetary Policy Committee whose target is set by the Treasury annually and which is presently 5 per cent +/- 2 .5 per cent.
But actions are speaking louder than words.
Compare the daily percentage change in the exchange rates of four bona-fide inflation targeting central banks- Euro, Japan, UK, and Australia-vis-a-vis the US$ over the past 18 months or so, to those of the Kenya shilling. See Chart.
Daily Percentage Change in Exchange Rates to the US$: 2024-2025.
The typical daily percentage change of the bona-fide inflation targeting banks exchange rates is around 1 per cent, and that number has not changed over the entire period.
The Kenya shilling-in black in the chart above-also followed that pattern through till August 2024. Thereafter, it broke away, exhibiting almost no daily change vis-a-vis the US$, apart from occasional minor bumps-apparently as the Central Bank of Kenya mastered its new operational procedures.
None of this is the organic effect of improved policies or confidence, as often inferred by the authorities’ references to having secured ‘exchange rate stability’. Instead, it reflects their direct engineering via foreign exchange intervention, overt and covert.
The motivation in August 2024 for this change is unclear, but we speculate that the instruction came from the Executive Office and not the Central Bank of Kenya. And after the Shilling slide to early 2024, we infer that the intent was to head off even the remotest chance of a repeat of that in the context of the Gen-Z protests.
Even so, the authorities might deny that this represents any substantive shift away from inflation targeting and merely codifies the bilateral peg as a prominent intermediate target.
But the entire intellectual foundation of inflation targeting is that there are no successful individual intermediate targets. Even the celebrated ‘inflation is always a monetary phenomenon’ turned out to be repeatedly rejected by the data worldwide causing abandonment of all monetary targets in favour of the entire suite of data, including monetary and exchange rates.
And when the de facto peg appeared, it could have been just temporary and so have passed as a mere footnote. But a year is a long time in macroeconomics. So, the paraphernalia of inflation targeting has become just that; Kenya is maintaining an unannounced peg to the US dollar.
This gives rise to a number of puzzles and concerns.
Most notable, when the change was made in August 2024, there was no announcement or official explanation. Though the stabilisation of the Shilling then was obvious, the authority’s policy and intentions were not clear at all. This lack of a framework of transparency directly compromises effectiveness and stability.
Then, a number of design issues arise, all indicative of hasty assembly of the new arrangement:
Why 129 to the US dollar-a rate we consider to be significantly overvalued relative to that consistent with Kenya’s full growth potential.
How did that decision get made?
Even so, why such an odd number and not 130 to the dollar?
Why peg to the US dollar, with which Kenya has limited engagement, and not a currency or basket with which engagement is significant?
Why is it (evidently) a fixed peg and not a crawl? Given the US inflation target of 2 and Kenya’s of 5, a crawl of 3 percent annually would at least render it fundamentally consistent with Kenya’s official inflation target and support claims that has some numerical congruency with the official inflation targeting regime.
And given that this actual fundamental inconsistency between the two will recur, how does it get resolved? This last point returns us to the lack of official announcement or explanation for the framework.
And this fundamental inconsistency is already evident in Kenya’s macro-to its detriment.
Underlying inflation-which we primarily measure from the series of one month seasonally adjusted annualized rates of inflation of non-food prices-from even somewhat before the period of the de facto dollar peg, has consistently been running at the low end of and mostly below the inflation target band.
The jump in October 2025 we read as predominantly one-off. But even the 12-month rate of growth in non-food prices has fluctuated between only 2 and 2.5 percent throughout, well below the target of 5 per cent and frequently below the target band.
Alongside, official core prices are signalling similarly. This persistent undershoot of underlying inflation has been masked only by the sharp ongoing rise in the relative price of food.
So, Kenya consumer prices, trying to adjust to the overvalued currency latterly coded into the de facto fixed dollar peg, have been trending significantly below the inflation target.
And the Monetary Policy Committee, rather than act decisively to get ahead of this and drive underlying inflation back up to target, has tip-toed with quarter-point policy rate cuts lest the de facto peg give way.
In this way, with the peg being maintained to a tee and the inflation target being consistently undershot for underlying and core inflation, the relative standing of the two in the monetary framework is revealed, with the inflation target taking second place very much-all at the expense of demand, output, and jobs.
The authorities dismiss any such concerns with bombast: interest rates and inflation are down, real growth is around trend, international reserves in US dollar are at record levels, and markets are happy.
But this looks like pride before the fall. Indeed, nominal interest rates have fallen, but with underlying inflation down too, real interest rates have fallen much less and insufficiently so; inflation is down, but far too far; real growth remains far below Kenya’s full potential;
international reserves are up, but as our colleagues argue separately, still insufficient for full defence of the peg, and at unknown cost in terms of covert intervention; in a propitious global environment with interest rates and the US dollar easing, Kenya has regained a modicum of market access but still at eye-watering yields; and as Adam Smith cautioned long ago, market happiness is a qualified measure of anything as they are solely interested in their own yields, and if that’s at others’ expense, too bad.
And at some point, the underlying inconsistencies in the de facto peg framework have to resolve and may be forced to do so if the recent benign global market environment turns perhaps alongside any number of potential domestic and regional strains materialising.
At that point, if not well before, we would strongly urge the authorities to abandon their experiment with undeclared pegging and return inflation targeting centred on 5 percent to unqualified pride of place in Kenya’s monetary framework.
Kwame Owino is the chief executive officer of the Institute of Economic Affairs (IEA) and Peter Doyle is American Economist, former IMF and Bank of England