Standard Investment Bank warns that global energy disruptions, higher borrowing costs and mounting inflationary pressures could complicate Kenya’s economic recovery, even as domestic liquidity remains stable and investor demand for government securities stays strong.
Kenya’s economic outlook faces mounting pressure from rising international fuel costs, higher global borrowing rates and persistent geopolitical tensions, with Standard Investment Bank (SIB) warning that the combination could increase inflation, widen the current account deficit and push domestic interest rates higher.
In its Fixed Income Weekly Report dated October 19, 2026, SIB said disruptions to global energy supply routes had triggered sharp increases in international petroleum prices, forcing the Energy and Petroleum Regulatory Authority (EPRA) to raise maximum retail fuel prices for the October 15 to November 14 pricing cycle.
Super Petrol prices increased by KSh12.93 per litre, diesel by KSh9.90 and kerosene by KSh28.49, reflecting escalating international landed costs as geopolitical tensions in the Middle East disrupted oil and refined petroleum product supplies.
The investment bank warned that continued pressure on energy markets could feed into domestic transport, manufacturing and distribution costs, complicating efforts to contain inflation and sustain economic growth.
The latest developments come as Kenya’s annual inflation rate climbed to 6.8% in September 2026, extending an upward trend that began earlier in the year. The rising cost of essential goods and services threatens household purchasing power while increasing operating expenses for businesses.
According to SIB, international disruptions affecting the Strait of Hormuz and the Red Sea corridor, combined with attacks on Saudi Arabia’s East-West pipeline infrastructure and restrictions on refined petroleum exports, have forced suppliers to seek more expensive cargoes from alternative markets.
Global free-on-board prices for Super Petrol, diesel and kerosene have risen by 89.45%, 90.64% and 84.01%, respectively, since February 2026, underscoring the scale of the supply shock.
The pressure was reflected in September’s landed petroleum costs, which increased by 11.81% for Super Petrol, 11.32% for diesel and 9.41% for kerosene compared with August.
However, the latest retail price adjustments were smaller than the increases in landed costs, reflecting government interventions intended to cushion consumers against the full impact of the international price shock.
SIB noted that the government-to-government fuel procurement framework continues to generate estimated savings of KSh17.04 per litre through capped freight and premium costs. The government has also extended the reduced 8% value-added tax on petroleum products through January 14, 2027.
In addition, the Petroleum Development Levy Fund received a total deployment of KSh29.4 billion during the 2025/2026 financial year, including KSh24.3 billion applied between April and June 2026 to support market stabilisation.
Despite these measures, the bank cautioned that supply constraints could persist, particularly for diesel, leaving Kenya exposed to further increases in import costs and domestic inflation if tensions in the Middle East escalate.
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Government borrowing costs face renewed pressure
Beyond the energy market, SIB identified rising global bond yields as another risk for Kenya’s fixed-income market, particularly as the government continues to rely heavily on domestic borrowing to finance its budget deficit.
The bank reported that average yields on Kenyan government securities edged up by approximately 0.22 percentage points during the week under review, reflecting the pressure building across the domestic debt market.
Internationally, US inflation accelerated to 3.9% year-on-year, while the yield on the US 10-year Treasury approached 4.85%. Higher returns on US government debt have increased pressure on emerging and frontier markets as investors demand greater compensation for holding riskier securities.
SIB said the global sell-off in sovereign bonds had also pushed African Eurobond yields higher, raising the cost of accessing international capital and adding to debt-servicing pressures.
The investment bank expects domestic borrowing demand to remain elevated as the government seeks to bridge its fiscal financing needs. This could sustain upward pressure on local interest rates over the medium term, even with relatively favourable liquidity conditions.
Higher borrowing costs would have implications for government debt servicing, corporate financing and the wider economy, particularly if banks and other investors demand higher returns to commit funds to longer-dated securities.
Kenya’s exposure to international markets is especially significant given the combination of elevated energy import costs, persistent fiscal constraints and rising global financing costs.
The US Federal Reserve is expected to maintain its target interest rate range of 3.75% to 4.00% in the immediate term, according to the report, with prospects for rate cuts later in 2026 having diminished following the acceleration in inflation.
The resulting environment could keep global financial conditions tight and limit the room available to frontier economies seeking to refinance debt or attract additional foreign capital.
Strong Treasury bond demand offers some relief
Despite the pressure on yields, investor demand for Kenyan government securities remained strong during the week, particularly in the primary Treasury bond market.
SIB reported that the Central Bank of Kenya received bids worth KSh84 billion for two reopened Treasury bonds against an initial offer of KSh50 billion, representing an overall subscription rate of 168%.
The government accepted KSh53 billion, equivalent to approximately 63% of the bids received.
The two securities carried coupon rates of 12% and 12.5%, respectively, with maturities extending to approximately 14.3 years and 29 years.
For the bond with a 14.3-year remaining maturity, the market-weighted average yield stood at 13.65%, while the weighted average yield on accepted bids was 13.72%.
The longer-dated bond recorded a market-weighted average yield of 14.18%, with accepted bids averaging 14.28%.
The results point to continued investor appetite for government debt, although the yields demanded by investors highlight the cost of raising funds over extended periods.
In the Treasury bill market, total bids declined to KSh69 billion from KSh75 billion the previous week. The government accepted KSh52 billion, with the overall subscription rate reported at 76%.
The 91-day Treasury bill remained the most sought-after instrument, attracting approximately KSh50 billion in bids against an offer of KSh8 billion. This represented a performance rate of 623%, according to SIB.
The demand suggests that short-term government paper continues to attract substantial investor interest, even as overall Treasury bill bids moderate.
In the secondary bond market, however, turnover fell by 26% week-on-week to KSh41 billion from KSh54 billion. Monthly turnover also declined to KSh293 billion in September from KSh342 billion in August, a decrease of about 14%.
The contrasting performance between strong primary auction demand and lower secondary market activity points to continued interest in government securities alongside reduced trading volumes in the secondary market.
Domestic debt maturities are also rising. SIB estimated that Treasury bill and bond maturities would total KSh244 billion in October, up from KSh238 billion in September, adding another consideration to the government’s domestic financing requirements.
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