The Central Bank of Kenya’s Monetary Policy Committee (MPC) is expected to hold a meeting this week. The Central Bank’s principal objective is the formulation and implementation of monetary policy directed to achieving and maintaining stability in the general level of prices. The aim is to achieve stable prices – that is low inflation – and to sustain the value of the Kenya shilling.
The MPC contributes to the achievement of low inflation by setting the rate of interest at which the Central Bank charge on loans to commercial banks. This rate referred to as the Central Bank Rate (CBR). The rate signals the monetary policy stance of the Bank.
Currently the CBR stands at 18% and it is seen as the main reason for the high interest rates commercial banks are charging on loans. This is because once a bank borrows from the CBK it must lend the money out at a higher rate than the one at which they borrowed so as to make a marginal gain. This explains why the interest rates on loans ranges between 19% and 23%. Banks charge rates higher than 18% to compensate themselves for the high CBR.
The CBK uses the CBR to regulate the amount of money commercial banks lend out to their customers. The lower the amount of money lent out, the lower the amount of money in circulation and therefore the lower the inflation.
Over the last few months the inflation rate has fallen consistently from 18.31% in January to 16.69% in February to 15.61% in March. Ideally, since the rate of inflation has been falling then the MPC should lower the CBR so as to induce the banks to lower their interest rates on loans and lend more money to the public as should occur with lowering inflation rates.
However, since inflation has fallen by a relatively small margin (approx. 2.7%) over the last 3 months, the MPC is expected to maintain the CBR at 18% so as to induce the inflation rate to fall even further in the coming months.