Excerpts from the statement by the Central Bank of Kenya:
Overall month-on-month inflation decreased to 5.8 percent in August 2015, from 6.6 percent in July, moving closer to the 5 percent target. Month-on-month non-food non-fuel inflation reversed its upward trend since April, falling to 4.5 percent inAugust from 4.7 percent in July. The decrease in inflation was due to lower food prices and moderating demand pressures, partially offsetting the pass-through effects of exchange rate movements.
The foreign exchange market was volatile in August and early September largely reflecting international developments, in particular the impact of the devaluation of the Chinese Yuan and continued strengthening of the U.S. dollar against most currencies. However, the tight liquidity conditions and direct interventions by the Central Bank of Kenya (CBK) helped stabilise the market. The current account deficit narrowed slightly in July 2015, due to a slowdown in imports and improved exports. In addition, diaspora remittances remain strong.
The banking sector is resilient although liquidity and credit risks remain. The CBK is closely monitoring the sector in view of the risks posed by volatility in the global markets.
The CBK’s Market Perceptions Survey of September 2015 showed that private sector firms expect stronger growth in 2015 compared to 2014, supported mainly by public investment in infrastructure and improved confidence in the economy. In addition, the Survey showed that inflation was expected to be stable in the remainder of 2015 supported by lower food and oil prices. However, the forecasted El Niño rains could disrupt food supply chains and exert pressure on food prices in the short term.
The Committee observed that the measures taken in the previous meetings had continued to bring inflation nearer to the 5 percent target. However, the persistent turbulence in the global financial markets remain a risk to the inflation outlook, and its impact on the exchange rate should be monitored. The MPC concluded that the current monetary policy stance and supporting measures remain appropriate. The Committee therefore decided to retain the CBR at 11.50 percent in order to anchor inflation expectations. The CBK stands ready to use the instruments at its disposal to maintain overall price stability.