The Central Bank of Kenya Monetary Policy Committee (MPC) retained the Central Bank Rate (CBR), the price at which the CBK lends money overnight to commercial banks, at 18 per cent, via a statement released by the CBK.
The MPC noted that the hike of the the CBR and other actions by the CBK over the last few months have had some of the intended effect in that:
- The country’s inflation rate has come down from 18.31% in January, to 16.69% in February.
- The Kenya Shilling has stabilised in the narrow range of KES 82.65 to 83.93 to the US Dollar.
- Demand pressure on inflation decreased following the decrease in private sector credit growth. Private sector credit is the amount of loans taken by businesses and individuals. This had been growing at 30.9% per year in December, but declined to 28%per year in January.
- Average commercial banks lending interest rates and the average spread between lending and deposit rates have also declined during the month.
- The MPC Market Perceptions Survey conducted in February 2012 revealed that the private sector expects inflation to continue declining; the exchange rate to remain stable and the economy to remain resilient in 2012.
Nevertheless, the Committee noted that there were still potential risks in the economy:
- The inflation measure excluding food and fuel (an inflation measure that excludes volatile items that are not subject to monetary policy) had yet to respond dramatically to its measures taken in the recent months.
- The forecast balance of payments continued to be a matter of concern as the heightened risks around the movement of oil through the Strait of Hormuz are already causing global crude oil prices to rise. Due to the significance of oil in the import bill, this was seen as a threat to both the stability of the exchange rate and continued easing of inflation pressure.
- Although private sector credit growth was declining, its effect on both the demand for imports and consumer goods had yet to be adequately felt.
- Uncertainties surrounding the resolution of the Greek debt crisis could cause a downturn in the Eurozone (countries that growth. This could depress tourism and demand for some of Kenya’s horticultural exports thereby constraining domestic economic activity (i.e. reducing the sale of local farmer and exporters’ produce) as well as supply of foreign exchange.
Given the above considerations, and the need to ensure that inflation continues to decline towards the Government target, the Committee maintained the Central Bank Rate at 18.0 percent. This will ensure that the monetary policy measures in place continue to work through the economy to deliver the desired outcomes of reducing inflation, dampening inflationary expectations and sustaining exchange rate stability.
(To read more about the CBK, the CBR, the MPC and Monetary Policy, check out Understanding the CBK’s Monetary Policy Stuff)