CBK holds key rate at 8.5 per cent, cites stable inflation

By JACKSON OKOTH

The Central Bank of Kenya (CBK) has maintained its hold on the Central Bank Rate (CBR) for the second consecutive time, all in a bid to put a tight lid on inflation.

In its meeting held yesterday, the Monetary Policy Committee (MPC) decided to retain the CBR at 8.50 per cent, dashing all hopes for cheaper bank credit.

In the last two months, the level of inflation has been on the upsurge raising the antennas of CBK, which has been easing its grip on the money market. Figures indicate that overall monthly inflation rose from 6.02 per cent in July 2013 to 6.67 per cent in August 2013.

This increase was largely an outcome of a base effect following notable price declines in 2012, coupled with increases in fuel and some food prices,” said CBK Governor Prof Njuguna Ndung’u.

The Committee noted that risks to the macroeconomic outlook are emanating from the global economy.

Oil prices

“Economic activity in the Eurozone remains weak while the instability in the Middle East and North Africa could escalate,” he said.

Following the instability in the Middle East and North Africa, international oil prices rose between June and August 2013 which contributed to the increase in domestic fuel prices.

In addition, foreign exchange inflows from tea exports to the region, which account for about a third of Kenya’s tea exports, could be affected.

These developments coupled with the high current account deficit remain a threat to macroeconomic stability.

Furthermore, implementation of the new VAT measures from this month will contribute to short-term increases in inflation, but the effects will be mild.

Section 36 (4) of the Central Bank of Kenya Act stipulates that the Central Bank shall publish the lowest rate of interest it charges on loans to banks and that rate shall be known as the Central Bank Rate.

The level of the Central Bank Rate is reviewed and announced by the Monteray Policy Commitee at least every two months and its movements, both in direction and magnitude, signal the monetary policy stance. The CBR is the base for all monetary policy operations in order to enhance clarity and certainty in monetary policy implementation.