The Central Bank of Kenya (CBK) has retained its benchmark lending rate despite rise in inflation and the poor performance of the shilling.
The bank’s Monetary Policy Committee (MPC) maintained its interest rate at 8.5 per cent stating that the overall inflation remained within the government target range of 2.5 per cent to 7.5 per cent. Furthermore, the committee said that the shilling continues to parade ‘relatively less volatility’ since the beginning of the year compared to other currencies.
“The Kenya Shilling continues to be supported by sustained foreign exchange inflows through diaspora remittances averaging 121.38 million US dollars per month in the first quarter of 2015, and the lower petroleum product import bill attributed to the decline in international oil prices since mid-2014,” CBK said in a statement.
Nonetheless, the shilling once again breached the technical support level of 95.00 shilling to close at 95.15 on Wednesday.
“The Committee noted that the current value of the Kenya Shilling to the US Dollar had adjusted to the slight misalignment in line with fundamentals in the economy,” MPC said.
Furthermore, the MPC stated inflationary prospects of the country may be triggered by the global and domestic foreign exchange markets, posing a threat to the price stability objective to the bank.
Kenya’s month on month inflation rose for the third consecutive session to 7.08 per cent in the month of April from 6.31 per cent recorded the previous month. According to data from the Kenya National Bureau of Statistics (KNBS), a rise in food prices due the country’s erratic weather patterns lifted inflation was the main factor.
“Based on evidence, and in particular the fact that inflation is at 7.08 percent is still within the medium term target range albeit with an upward trajectory, a change in monetary policy stance by the monetary policy committee would have not been justified,” Jared Osoro Director, Research and Policy at Kenya Bankers Association told cnbcafrica.com.
With this in mind, the MPC has announced that they will ‘pursue the current tightening bias stance in the money market through the CBK monetary policy operations in order to anchor inflationary expectations’.
“So the MPC’s decision is well founded. However, any forward guidance that one could read from the MPC’s indication that it will pursue a tightening bias is not well anchored given the positivity of the committee on both price and foreign exchange stability amidst the pressure on both fronts in the recent past. In essence, the tightening bias signal is not clearly signalled by the MPC,” Osoro said.