Kenya's central bank held its central bank rate (CBR) steady at 8.50 percent, with no demand-driven inflation pressures though there are risks to the economic outlook from global events along with the high current account deficit that remain a threat to macroeconomic stability.
In addition, the Central Bank of Kenya (CBK) said the implementation of new VAT measures from this month will contribute to a short-term increase in inflation but the effects will be mild.
The CBK, which has cut rates by 250 basis points this year after cutting by 700 points in 2012, said a rise in inflation in August to 6.67 percent from 6.02 percent in July was largely due to an increase in fuel and some food prices along with the base effect from notable declines in 2012.
Despite the rise, inflation is within the government's target band of 5.0 percent, plus/minus 2.5 percentage points. Non-food-non-fuel inflation, which measures the impact of monetary policy, eased to 3.86 percent in August from 4.04 percent, reflecting reduced demand pressures in the economy.
"These developments, coupled with non-inflationary private sector credit growth continued to support a stable short-term outlook for inflation," the CBK said.
The exchange rate of Kenya's shilling also remained stable since the bank's last meeting in July with the level of usable foreign exchange reserves at US$ 5.75 billion at the end of August, the equivalent of 4.1 months of import cover.
The exchange rate fluctuated within a narrow range of 87.37 shilling to 87.70 to the U.S. dollar in July and ongoing initiatives by the government to attract foreign investors and expand the trade markets would support exchange rate stability through increased foreign exchange earnings in the future, the CBK said.
Kenya's current account deficit has kept the currency under pressure but the central bank has argued that a weaker shilling can help boost the economy's international competitiveness.