Kenya's central bank maintained its Central Bank Rate (CBR) at 8.50 percent, as expected, saying the rise in inflation had slowed and still remains within the bank's target range.
The Central Bank of Kenya (CBK), which has maintained its rate since May 2013 after cutting it by 250 basis points in the first months of last year, added the shilling's exchange rate had remained stable despite recent short-term seasonal pressures mainly attributed to corporate dividend payments.
Kenya's headline inflation rate rose to 7.39 percent in June from 7.3 percent in May, close to the upper limit of the bank's target of 7.50 percent. The bank targets inflation at a midpoint of 5.0 percent, plus/minus 2.50 percent.
The shilling's exchange rate fluctuated within a range of 87.38 to 87.92 against the U.S. dollar in the month of June compared with May's range of 86.87 to 87.86. The shilling was trading at 87.85 to the dollar today, down 1.6 percent from the start of the year.
The bank said the exchange rate was supported by foreign exchange inflows from diaspora remittances and increased foreign investor participation in the Nairobi Securities Exchange amid enhanced confidence following last month's successful sovereign bond issuance.
The central bank's level of usable foreign exchange reserves rose to US$ 6.501 billion as of July 7, from $6.308 billion at the end of April, providing "adequate cushion for the exchange rate against temporary shocks," the bank said.
Diaspora remittance rose to $119.66 million in May from $113.41 in April. A June survey by the central bank showed continued optimism in the private sector for strong growth in 2014 while inflation and the exchange rate were expected to remain stable for the rest of the year.
A notable development in Kenya's banking sector was the recent launch of the Kenya Banks' Reference Rate (KBRR) with the aim of improving the supply of private sector credit and mortgage finance by making the price of credit more transparent.
KBRR will be a base rate for all commercial banks' lending and one of its components is the central bank's CBR rate, which means an enhanced transmission of the central bank's policy. KBRR will be computed as an average of CBR and the weighted 2-month moving average of 91-day Treasury bill rates and announced by the central bank every six months.
KBRR was set at 9.13 percent effective from July 8 and will be reviewed in January 2015.