Central Bank of Kenya keeps rates on hold as inflation outlook remains benign

The Monetary Policy Committee of the Central Bank of Kenya met today and decided to keep interest rates on hold at 10%. This is after rates were lowered by 50 basis points from 10.5% at its previous meeting. The committee mentioned that inflationary pressures were not significant and that in the short term inflation should remain within the target. The committee also mentioned that they were waiting for more information regarding external and domestic economic developments before they could decide to change rates.

Inflation in Kenya was recorded at 6.5% y/y in October 2016 from 6.3% y/y in the previous 2 months which is within the bank’s target of 2.5 - 7.5%. This was mainly driven by an increase in food inflation (mostly from tomatoes and sugar) as well as fuel prices going from deflation to contributing positively towards inflation. Core inflation accelerated to 5.4% y/y from 5.1% y/y in September 2016 which could be a sign of increasing demand led inflation. Overall the central bank was satisfied with the inflation numbers and there were no immediate price pressures in the system.

The Kenyan Shilling has been relatively stable in 2016. Increases in diaspora remittances (even after the British Pound weakened against the Shilling) as well as a recovery in tourism numbers have provided a welcome boost foreign exchange earnings. The lower oil prices have decreased the import bill along with lower imports of machinery as most of the infrastructure imports were done in 2015. Reserves are currently at $7.3 billion, which provides 4.8 months of import cover. This is accompanied by the credit facility from the IMF which stands at $1.5 billion.

The central bank further mentioned that there is interest from foreign banks in entering the Kenyan banking market. The average liquidity ratio of banks in Kenya has increase to 43.6% in October from 41.9% in August. The bank declared that the effect of the interest rate caps is still being monitored and there is currently an inadequate amount of data to “…facilitate conclusive analysis of their impact on monetary policy and the overall economy.” This was as private sector credit growth is at a stagnant 4.6%.

Going forward inflationary pressures are likely to be driven by the base effect caused by fuel inflation but this could be offset by food inflation moderating. All in all inflation is expected to remain with the target range, although towards to the top-end of the range, into the first quarter of 2017. Due to continuing uncertainties which are affecting global economies the Central Bank of Kenya is likely to keep rates on hold for the rest of this year and probably into the first quarter of next year. Growth is still expected to be 6.1% for 2016 however 2017’s growth rate could be slightly lower than 2016’s.

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