Kenya Holds Key Interest Rate at 9%

The Central Bank of Kenya left its benchmark interest rate unchanged at 9.0 percent at its January 28th 2019 meeting, as widely expected. Policymakers said that the decision is appropriate and based on the backdrop of domestic macroeconomic stability, economic growth prospects, lower international oil prices, and increased uncertainties and weaker global growth outlook. The Committee noted that inflation expectations remained well anchored within the target range and that the economy was operating close to its potential. The bank also said that they will continue to monitor global and domestic economic developments and if necessary will take additional measures.

Excerpts from the MPC Press Release:

Month-on-month overall inflation remained stable within the target range in November and December 2018, largely due to lower food prices following favourable weather conditions, reduction in electricity tariffs, decline in fuel prices, and limited demand-driven inflationary pressures. Overall inflation was 5.7 percent in December compared to 5.6 percent in November. Non-food-non-fuel (NFNF) inflation remained below 5 percent, indicating that demand pressures in the economy were muted. Overall inflation is expected to decline in the near term, largely due to lower international oil prices, expectations of lower electricity prices following increased power generation from cheaper sources, and expected stability in food prices.

The economy picked up strongly in 2018, with data for the third quarter showing that real GDP growth accelerated to 6.0 percent in the first three quarters of 2018 from 4.7 percent in a similar period in 2017. An assessment of available indicators of economic activity showed that the strong growth continued into the fourth quarter of 2018. This improved performance reflected higher agricultural production, the continued recovery of the manufacturing sector, and the buoyant services sector, particularly trade, information and communication, accommodation and restaurants, transport and storage, and real estate. Micro, Small and Medium-Scale Enterprises (MSMEs) remained resilient in 2018 and are expected to support growth in 2019, to the extent that their constraints, including access to finance, are alleviated. Growth is expected to remain strong in 2019, supported by agricultural production, a stable macroeconomic environment, and continued improvement in the business environment. Additionally, the alignment of Government spending to the Big 4 priority sectors is expected to boost economic activity in manufacturing, agriculture, construction and real estate, and health sectors.

The MPC Private Sector Market Perception Survey conducted in January 2019 indicated that inflation expectations were well anchored within the target range, with respondents revising their inflation expectations for the near term downwards on account of expected lower prices of food, fuel and electricity. The Survey also revealed increased optimism that economic growth would be stronger in 2019 due to, among other factors, a better investment climate, continued infrastructure development, and implementation of the Big 4 projects by the Government. Expectations of increased agricultural production, the continuing decline in international oil prices, a stable macroeconomic environment and strong tourism performance also contributed to the strong positive sentiment. Nevertheless, the optimism was tempered by the slow growth in private sector credit, and concerns of a likely slowdown in global growth in 2019. 

Global growth is expected to weaken in 2019, with increased uncertainties with regard to the trade tensions between the U.S. and China, Brexit negotiations, slowdown of the Chinese economy, the partial shutdown of the U.S. government, and the pace of normalization of monetary policy in the advanced economies. These developments could lead to higher volatility in the global financial markets.

The Committee noted that inflation expectations remained well anchored within the target range, and that the economy was operating close to its potential. The MPC concluded that the current policy stance remains appropriate, and will continue to monitor any perverse response to its previous decisions. The Committee therefore decided to retain the CBR at 9.00 percent.

Kenya Holds Key Interest Rate at 9%

Central Bank of Kenya | Luisa Carvalho |
1/28/2019 2:11:35 PM