Kenya's central bank held its Central Bank Rate (CBR) stable at 8.50 percent to "encourage a full impact of this monetary policy path to be felt throughout the economy."
The Central Bank of Kenya (CBK), which has maintained its rate since May last year after cutting it by 250 basis points in the first few months, said its policy stance had anchored inflationary expectations and continues to result in the desired objective of price stability.
Kenya's inflation rate eased further to 7.15 percent in December from November's 7.36 percent, continuing the drop since September's 8.29 percent when it breached the central bank's upper limit. CBK targets inflation of 5.0 percent, plus/minus 2.5 percentage points.
Inflation jumped in September after a 16 percent value-added-tax (VAT) was added to a wide range of goods.
The central bank said confidence in Kenya's economy remains strong, with remittances from abroad resilient and averaging US$ 110.6 million a month from July to November a and market perceptions' survey from December showing that the private sector expects inflation and the exchange rate to remain stable and growth strong in 2014.
The central bank also said the recent visit and statements by International Monetary Fund (IMF) Managing Director Christine Lagarde had provided a "positive signal to potential investors."
Kenya is preparing to launch its first Eurobond, hoping to raise as much as $2 billion, and the CBK said this would further bolster the country's foreign exchange reserves and support exchange rate stability.
The central bank's foreign exchange reserves rose to $6.164 billion at the end of December from 5.868 billion end-October with the bank attributing the build-up of reserves to the disbursement of $110 million by the IMF.
Kenya's shilling has been largely stable since the central bank's last meeting in November, fluctuating in a range from 85.72 and 86.72 against the U.S. dollar in December. Last year the shilling rose strongly in the first few months of the year from 86.76 to the dollar end-2012 but then dropped in early May as investors reassessed the prospects for emerging markets.
Kenya's Gross Domestic Product expanded by 1.6 percent in the third quarter from the second quarter for annual growth of 4.4 percent, slightly up from 4.3 percent in the second quarter.
During her visit to Kenya, Lagarde on Jan. 6 said the country's economic gains over the past few years "have been nothing short of remarkable" and economic reforms had laid the foundations to lift the country to middle-income status within the next decade.
Lagarde added that sub-saharan Africa remains the second-fastest growing region in the world and the IMF expects this region to enjoy growth of close to 6 percent in 2014.
"A more modern framework for monetary policy has helped keep inflation expectations in check, despite adverser shocks," Lagarde said about Kenya's monetary policy, adding this had put the country in a favorable condition to tap international financial markets with its planned Eurobond.
But as the country becomes more integrated into the global economy, it will also be more exposed to external shocks through spillovers from trading partners' economies or volatility in financial markets, with stronger foreign exchange reserves and a lower debt helping ensure the country can remain resilient to such shocks.