The bank’s Monetary Policy Committee (MPC) noted that the country’s overall inflation has continued to decline over the last two months and lingering within the government target.
“Overall month-on-month inflation declined from 6.09 per cent in November 2014 to 6.02 per cent in December 2014, mainly reflecting significant declines in the prices of fuel and electricity. However, these declines were partly offset by a rise in the food index during the period. This indicates that there was no significant demand driven inflationary pressure or threat to the economy,” said the Central Bank of Kenya (CBK).
Nonetheless, the committee observed that the strengthening of the US Dollar pressured the shilling. However, interventions from the CBK and resilient foreign exchange inflows through diaspora remittances and increased activity in the Nairobi bourse halted short-term volatility.
“The sustained confidence in the economy reflected in the massive oversubscription of the Sovereign Bond that was re-opened in December 2014 also supported the Kenyan Shilling,” the bank said.
The Central Bank of Kenya said it would 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.
The Central Bank Rate (CBR) 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.
Policymakers at the same time revised the Kenya Bank’s Reference Rate (KBRR) to 8.54 per cent from 9.13 per cent. The new rate will be effective from 14 January 2015 until its next review in July 2015.
“Since the rollout of the KBRR framework in July 2014, the average lending rate for the banking sector has been on a downward trend, declining from 16.9 per cent in July 2014 to 15.9 percent in November, 2014,” CBK said.
The KBRR which tracks the CBR as well as the weighted two-months moving average of the 91-day Treasury Bill, was introduced in June last year to enhance transparency in the pricing of credit as well as improve the transmission of monetary policy signals.
The MPC met on Wednesday afternoon to review market advancements and the outcomes of its previous monetary policy decisions.