Kenya's central bank held its Central Bank Rate (CBR) steady at 8.50 percent, as expected, saying inflationary expectations had remained stable despite new VAT measures and there were no demand-driven inflationary pressures that would require a revision of the current policy stance.
The Central Bank of Kenya (CBK), which has cut its rate by 250 basis points this year, noted the fall in October inflation but added that it was still above the government's 7.50 percent upper bound medium-term inflation target and the rise of the shilling's exchange rate in October had moderated any impact of the pass-through effect of imported inflation.
Kenya's inflation rate fell 7.76 percent in October after rising to 8.29 percent in September, when the 16 percent Value-Added-Tax (VAT) was added to a wider range of goods, fueling expectations that the central bank could raise rates at today's meeting to prevent a pass-through of the tax to all prices. But after inflation fell in October, economists pushed back their rate hike expectations.
Kenya's inflation declined last year, bottoming out at 3.2 percent in December. It then rose but remained steady between 4 and 5 percent for several months before rising from July to September.
"The results are an indication of a moderation of inflationary pressure in the economy that also reflects the fact that inflationary expectations have not changed even after implementation of the VAT Act in September 2013," the CBK said.
Kenya's shilling has recently strengthened, supported by foreign exchange inflows and liquidity management, the bank said. The shilling fluctuated within a range of 84.72 and 86.79 to the U.S. dollar during October compared with a range of 86.65-87.58 in September. Foreign exchange reserves rose to US$ 5.892 billion end-October, the equivalent of 4.1 months of imports, from $5.751 billion end-August.
Kenya's cumulative 12-month current account deficit declined to 7.5 percent as a percentage of Gross Domestic Product from 10.45 percent in December 2012, the bank said, adding that it had been working with the country's statistics office and the International Monetary Fund to improve the quality and speed of delivery of balance of payments data.
Kenya's GDP grew by 0.7 percent in the second quarter from the first quarter for annual growth of 4.3 percent, down from 5.2 percent and the bank said the weak recovery of the global economy and instability in the Middle East and North Africa continued to pose risks to the outlook.
The sluggish recovery in the euro zone has also slowed down export earnings from tourism "while the temporary partial shutdown of the US government in October 2013 could affect Diaspora remittances from North America in the short term," the CBK.
But confidence in Kenya's economy has been sustained, with rising participation by foreign investors on the Nairobi stock exchange and the bank's survey from October showed that the private sector expects inflation and the exchange rate to remain stable and growth to be strong this year.
The banking sector also remains solvent and strong, with the access to financial services among the highest in Africa, enhancing the transmission of monetary policy to the real sector.
The central bank said the current tightness in the interbank market, with short-term increases in the interbank rate, was due to a skewed distribution of liquidity in the market and it would continue to work with market participants to improve the mechanism for liquidity management.
Kenya's government targets annual inflation of 5.0 percent, plus/minus 2.5 percentage points.