Kenya Monetary Policy Unchanged in July

The Monetary Policy Committee of the Central Bank of Kenya decided on July 9th to leave the central bank rate unchanged at 8.5 percent. Despite inflation and exchange rate stability, the Committee cited risks from the high current account deficit and current instability in the Middle East and North Africa which could affect the price of oil and tea exports.
Joana Taborda | 7/9/2013 3:17:29 PM
Excerpt from the statement by the Central Bank of Kenya:

Both overall and non-food-non-fuel month-on-month inflation rates remained within the allowable margin of 2.5 percent on either side of the Government's medium-term target of 5 percent. Non-food-non-fuel inflation, which measures the impact of monetary policy, declined from 3.91 percent in May to 3.86 percent in June. This reflects reduced demand pressure in the economy. These developments suggest no significant immediate underlying inflation pressure. Furthermore, the declining international oil prices coupled with non-inflationary credit growth support a low and stable short-term outlook for inflation.

The exchange rate remained stable: it fluctuated within a narrower range of between Ksh.85.29 and Ksh.86.06 for the US Dollar in June 2013 compared with a range of Ksh.83.72 and Ksh.84.88 in May 2013. Exchange rate continuous adjustment to stability in the period was supported by effective liquidity management and rising foreign exchange inflows through diaspora remittances and through foreign investors buying into Government securities. 

The latest data from the Kenya National Bureau of Statistics shows that the economy registered a strong growth rate of 5.2 percent in the first quarter of 2013. This mainly reflected the current macroeconomic stability characterised by a low and stable inflation rate and a stable exchange rate, and a strong performance of the agricultural sector which grew at 8.3 percent compared with 2.1 percent in the first quarter of 2012.

The Committee noted that confidence in the economy has been sustained. The latest World Bank Country Policy and Institutional Assessment rating places Kenya as one of the top two countries in Sub-Saharan Africa. In addition, diaspora remittances increased from USD105 million in April to USD110 million in May 2013. Further, the MPC Market Perceptions Survey conducted in June 2013 showed that the private sector expects inflation and the exchange rate to remain stable in the remainder of the year, and sustained optimism for a strong recovery in growth in 2013.

Despite these developments, the Committee noted that there remain risks to the macroeconomic outlook. These risks emanate mainly from the high current account deficit, and the current instability in the Middle East and North Africa (MENA) and Eurozone which are a threat to the general stability of prices. Previous experience had shown that disturbances in the MENA region could affect the price of oil and tea exports. This could have balance of payments and inflation implications.

The Committee concluded that the monetary policy measures continue to deliver the desired results. However, in view of the above considerations, and the need to provide time for previous MPC decisions to work through the economy, the Committee decided to retain the CBR at 8.50 percent.

Kenya Monetary Policy Unchanged in July