The Central Bank of Kenya’s Monetary Policy Committee (MPC) is expected to hold a meeting today. 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.
Over the last few months the MPC has maintained the CBR at 18% and indeed this high stance has benefited the economy as inflation has declined steadily from around 20% in November last year to 15.61% in March and, as reported yesterday, to 13.06% in April.
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.
Despite these gains in curbing inflation the MPC may maintain the CBR at 18% so as to stimulate a further fall in inflation and control market liquidity. The ideal inflation rate, as set by the government is 9% and the CBR may be maintained in an attempt to push inflation down to the desired level.