Global Economic Headwinds

Australia's annual inflation rate unexpectedly climbed to 3.8% in the year to October 2025, up from 3.6% in September, according to data released on Wednesday, November 26 by the Australian Bureau of Statistics (ABS). This development has dampened expectations for interest rate cuts by the Reserve Bank of Australia (RBA) and raised the possibility of future hikes, serving as a significant indicator of persistent global inflationary pressures that could have ripple effects on economies like Kenya's.

The primary driver behind the surge was a 37.1% annual increase in electricity prices, a figure largely influenced by the cessation of government energy subsidies. David Gruen, the head of the ABS, noted this spike reflected a "huge valley" in prices from the previous year when household energy rebates were at their peak. This volatility in energy costs underscores a global challenge, including for Kenya, where fuel and electricity prices are major components of the inflation basket.

Of greater concern for economists is the rise in underlying inflation—which strips out volatile items like energy—from 3.2% to 3.3% over the same period. This suggests that price pressures are becoming more broadly embedded in the Australian economy. Cherelle Murphy, Chief Economist at EY, stated there was "no chance" of a rate cut before Christmas and that the RBA might even contemplate a rate hike in 2026 if the trend continues.

The Kenyan Context: A Stable but Cautious Outlook

In contrast to Australia's accelerating inflation, Kenya's annual inflation rate held steady at 4.6% in October 2025, the same as in September, as reported by the Kenya National Bureau of Statistics (KNBS). This marks the 17th consecutive month that inflation has remained within the Central Bank of Kenya's (CBK) target range of 2.5% to 7.5%. The stability has been supported by moderating prices for key food items like maize flour and cooking gas.

However, the Australian experience provides a crucial lesson on the precarious nature of this stability. While Kenya's core inflation slowed to 2.7% in October, non-core inflation, which includes energy and transport costs, rose. This highlights Kenya's vulnerability to the same external shocks affecting developed economies. The African Development Bank projects that the East Africa region will lead the continent with 5.9% growth in 2025-26, partly due to cooling inflation. Yet, this positive outlook is contingent on managing external pressures and maintaining macroeconomic stability.

Monetary Policy Divergence and Implications

The latest figures from Australia have solidified expectations that the Reserve Bank of Australia will keep its benchmark interest rate on hold at 3.60% at its final meeting for the year in December. The central bank has emphasized its focus on taming inflation, which is not expected to return to its 2-3% target band until mid-2026. The market has now priced out the chance of a near-term rate cut, with some analysts, like Harry Murphy Cruise of Oxford Economics Australia, suggesting a hike cannot be ruled out.

This contrasts with the recent move by the Central Bank of Kenya, which cut its benchmark lending rate to 9.25% in October to ease inflationary pressure and support growth. The divergence in monetary policy paths between a developed economy like Australia and an emerging market like Kenya reflects differing domestic conditions. However, a prolonged period of higher interest rates in major economies can strengthen the US dollar, potentially increasing import costs and debt servicing burdens for Kenya.

Australian Treasurer Jim Chalmers has acknowledged the ongoing cost-of-living pressures and indicated the government will decide within weeks whether to extend energy bill relief measures beyond December. This policy dilemma—balancing immediate relief for households against the risk of fueling further inflation—is a familiar challenge for policymakers worldwide, including in Nairobi.

For Kenya, the developments in Australia serve as a timely reminder of the interconnectedness of the global economy. While domestic factors currently favour stability, vigilance is required. The trajectory of global energy prices, supply chain dynamics, and the monetary policy decisions of major central banks will continue to shape Kenya's economic landscape, influencing everything from the price of unga to the cost of borrowing.