The Monetary Policy Committee (MPC) of Kenya’s central bank decided on September 22 to hold the benchmark interest rate at 11.5%, saying that although inflation has abated over the past couple of months, the persistent turbulence in the global financial markets poses risks to the outlook and inflation expectations need to be anchored.
The Central Bank Rate (CBR) has been raised by a total of 300bp since early June as inflationary pressures intensified amid a sharp depreciation of the local shilling currency and rising fuel prices. The shilling has depreciated by more than 8% against the US dollar since May. It has lost about 14% of its value since the beginning of the year as investors’ appetite for emerging market assets has been swaying amid US rate hike and China-related restlessness.
The central bank’s market interventions to support the stubbornly depreciating shilling have stemmed the volatility and tightened liquidity, but have also contributed to the depletion of its foreign exchange reserves, which have narrowed by $1.23bn this year to $6.2bn as at September 17. The import coverage dropped to a multi-year low of 3.94 moths from 4.85 months at the end of 2014.
However, the Central Bank of Kenya (CBK) said that the current level of forex reserves, coupled with the $688.3mn precautionary facility with the International Monetary Fund (IMF), “continue to provide an adequate buffer against short-term shocks”.
The CBK’s Market Perceptions Survey made in September showed increasing optimism amid private sector firms. Economic growth is projected to improve this year from last year’s 5.3%, mainly thanks to public infrastructure investments and improved confidence in the economy, whereas inflation is seen staying 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 CBK warned.
A further slowdown in food costs growth cut Kenya’s headline annual inflation to a six-month low of 5.84% in August from 6.62% in July, bringing it closer to the government's medium-term target of 5% (plus/minus 2.5pp).
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