Kenya’s central bank has kept its key lending rate on hold at 8.5% at its latest Monetary Policy Committee (MPC) meeting. The MPC refrained from easing further its monetary policy despite low inflationary pressures and stable exchange rate, saying that there are risks to the macroeconomic outlook, emanating mainly from Kenya’s high current account deficit and the current instability in the Middle East and North Africa (MENA) and the Eurozone which pose some threats to the general price stability. The MPC said that disturbances in the MENA region could affect oil prices and tea exports, which would boost inflation and inflate further the current account deficit.
The MPC noted that both overall and non-food-non-fuel month-on-month inflation rates remained within the 2.5% margin on either side of the government's 5% medium-term target. Kenya’s headline monthly inflation rose to 4.91% in June from 4.05% in May reflecting higher food prices and base effects. The non-food-non-fuel inflation, which measures the impact of monetary policy, fell to 3.86% from 3.91%, suggesting reduced demand pressures. According to the MPC, those developments indicate no significant inflation pressures, while the declining international oil prices coupled with non-inflationary credit growth support a low and stable short-term inflation outlook.
Kenya’s economy grew 5.2% in Q1 2013, boosted mainly by the strong performance of the agricultural sector, which expanded by 8.3%, compared to a 2.1% growth in Q1 2012. The MPC said that economic growth was supported by the macroeconomic stability characterised by a low and stable inflation rate and a stable exchange rate. The MPC Market Perceptions Survey conducted in June 2013 showed that the private sector expects inflation and the exchange rate to remain stable by the end of the year, and sustained optimism for a strong recovery in growth in 2013.
The MPC noted that the exchange rate remained stable, fluctuating between KES 85.29 and KES 86.06 for one US dollar in June, compared to KES 83.72- KES 84.88 in May. The central bank’s usable foreign exchange reserves stood at USD 5.81bn in June, equivalent to 4.22 months of import cover.
The MPC noted also that the government’s domestic borrowing target of KES 106.47bn for the fiscal 2013/14 was significantly below the KES 165.7bn for the previous fiscal year, which, coupled with the planned Eurobond issuance, should ensure that domestic borrowing does not exert pressure on interest rates on government securities.
The MPC estimates that the banking sector remains solvent and resilient. Gross loans increased by 1.6% m/m to KES 1.44trln in May 2013.
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