The Central Bank of Kenya's inflation-targeting framework and the 2015 shilling slide

The Central Bank of Kenya formally adopted an explicit inflation-targeting framework in 2013, setting a target of 5% with a tolerance band of plus-or-minus 2.5 percentage points, replacing a looser monetary-targeting approach and giving the Monetary Policy Committee a clearer mandate to act decisively when the shilling or prices moved outside its comfort zone. That framework was tested again in 2015, when a fresh wave of shilling depreciation, driven by a stronger US dollar globally and domestic concerns about the current account, threatened to push imported inflation above target. The MPC responded with two large, closely spaced moves: a 150-basis-point increase in the Central Bank Rate on June 9, 2015, followed by a further 150-basis-point increase on July 7, 2015, tightening policy by a full 3 percentage points in a single month, among the most aggressive sequences in the bank's history. The CBK justified the pace by pointing to the speed with which currency weakness was passing through to consumer prices, arguing that a slower response risked entrenching inflation expectations. The episode illustrated how the formal inflation-targeting mandate adopted in 2013 changed the central bank's tolerance for currency volatility compared with its more gradual responses in earlier depreciation episodes.