During its bi-monthly meeting, the committee kept the benchmark interest unchanged despite the East African nation’s overall inflation surpassing the government’s target of 7.5 per cent.
“The committee noted with concern that the overall inflation exceeded the upper bound of the prescribed range of the medium-term target of 5 per cent in both July and August 2014,” a statement by the committee read.
The country’s rate of inflation in August was at its highest level since June 2012 standing at 8.36 per cent in August from 7.67 per cent in July, this was mainly because of rising food, electricity and transport prices.
Nonetheless, the committee cited that the exchange rate has maintained a stable trend saying, “The exchange rate continued to be supported by resilient foreign exchange inflows through diaspora remittances and sustained foreign investor participation in the Nairobi Securities Exchange (NSE).”
In July the pricing formula of the Kenya Banks’ Reference Rate (KBRR) was introduced at 9.13 per cent to act as the new base rate of all commercial bank’s lending rate. The KBRR tracks the Central Bank Rate (CBR) as well as the weighted two months moving average of the 91-day Treasury Bill and will be reviewed twice a year.
The CBR, which is meant to guide commercial banks to review their lending rates based on prevailing macro-economic conditions, has largely been overlooked leading to the high cost of borrowing.
The Central Bank of Kenya said it will continue to monitor key macroeconomic aggregates and any emergent risks from the external and domestic economies that may impact on price stability in order to continue to anchor inflationary expectations.
Marcel Mballa-Ekobena of SBG Securities believes that inflation will not have an impact in the coming months on the benchmark lending rate.
“The reality of these numbers is that we are in a completely different world. Maybe two years ago inflation numbers were extremely high and they pretty much dictated which way the policy rate was going to go. The economics is what we have to focus on and quite frankly the fundamentals seem sound so inflation up on say foodstuff as the MPC puts it is possibly a temporality issue. What you have to remember is that year to date inflation is still within target so there is probably a lot more to argue that the rates should state where they are,” Mballa-Ekobena said.