Wednesday, January 14, 2015

Kenya holds rate to ensure inflation continues to fall

    Kenya's central bank maintained its benchmark Central Bank Rate (CBR) at 8.50 percent "to anchor inflation expectations" and ensure that inflation continues to decline toward the government's 5.0 percent target.
    The Central Bank of Kenya (CBK), which has kept its CBR rate steady since May 2013, also said KBRR - the Kenya Banks' Reference Rate that replaced the Base Lending Rate in July 2014 to improve the transmission of monetary policy into banks' lending rates and enhance the transparency of credit pricing - was revised down to 8.54 percent from 9.13 percent in light of the steady CBR and the weighted 2-month moving average of the 91-day Treasury bill rate.
    The KBRR will next be reviewed in July 2015 if market conditions do not change significantly.
    Kenya's consumer price inflation rate eased further to 6.02 percent in December from 6.09 percent in November, mainly due to declines in fuel and electricity that were partly offset by higher food prices.
    "This indicates that there was no significant demand driven inflationary pressure or threat to the economy," the CBK said, adding that lower oil prices were helping deliver the desired decline domestic prices and thus inflation.
    Confidence in Kenya's economy remains strong, the CBK said, citing its market perception survey from December that shows private sector firms expect a stable inflation and an exchange rate along with stronger growth in 2015.

    In the third quarter of 2014, Kenya's Gross Domestic Product contracted by 3.32 percent from the second quarter for annual growth of 5.5 percent, helped by an expansion of the finance and insurance sector along with a strong performance of the construction, wholesale and retail trade, information and communication, and agriculture and forestry sectors, the central bank said.
    The CBK said the exchange rate of the shilling against the U.S. dollar had "maintained its stable trend" while strengthening against the euro, sterling, the yen and regional currencies, with the shilling's exchange rate supported by "resilient" foreign exchange inflows from diaspora remittances, increased net purchases of equity by foreign investors.
    Interventions in the foreign exchange market by direct sales to commercial banks have stopped short-term volatility, the CBK added.
    The shilling has been depreciating against the dollar since October 2013 and fell by 4.6 percent in 2014. Today it was quoted around 91.40, down from 90.62 at the start of the year.
    The CBK's level of usable foreign exchange reserves rose to US$7.424.7 billion, or 4.79 months of import cover at the end of December, from 7.116.3 billion at the end of October, helped by the proceeds from the re-opened, Sovereign Bond in December, which the CBK said was massively oversubscribed.
    "This build-up is considered adequate to cushion the exchange rate against short-term shocks and excess volatility," the CBK said.
    In November Njuguna Ndung'u told Reuters that Kenya's public debt was sustainable at 46 percent of GDP because growth is strengthening. The east African nation raised $2 billion in June 2014 from a debut Eurobond issue.


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