The Central Bank of Kenya (CBK) said its recent measures had yet to be fully transmitted to the economy and in particular the increase in the Kenya Banks' Reference Rate (KBRR) which first takes effect from this month.
The CBK has raised its rate by a total of 300 basis points this year following hikes in June and then in July. KBRR, which was launched in July last year and reviewed every six months, was raised to 9.87 percent on July 8 from January's 8.54 percent as a consequence of the two rate hikes.
Kenya's inflation rate eased in July to 6.62 percent from June's 7.03 percent - remaining within the government's target of 5.0 percent, plus/minus 2.5 percentage points - due to lower food prices and helped offset the rise in fuel prices and the pass-through effects of the shilling's depreciation.
The shilling has been under pressure since March due to weaker exports of tea and declining revenue from tourism in light of attacks by insurgents and the general rise in the U.S. dollar.
But since mid-July the shilling has stabilized and was trading at 101.13 today, up from 103.3 on July 13 but still down 10.5 percent this year.
"The foreign exchange market was volatile in early July 2015, but has stabilized reflecting in part the impact of monetary policy measures," the CBK said, adding open market operations and the sale of foreign exchange had stemmed volatility and led to tight liquidity.
While Kenya's current account deficit has widened due to import of capital goods and lower export earnings, the CBK said diaspora remittances remained strong.
Kenya's foreign exchange reserves amounted to US$6.413 billion at the end of July, down from $6.630.9 billion according to the central bank's July 8 statement. It added that together with its precautionary facility with the International Monetary Funds, it has an "adequate buffer against short-term shocks."
The Central Bank of Kenya issued the following statement:
"The Monetary Policy Committee (MPC) met on August 5, 2015 to review market developments and the outcomes of its previous monetary policy decisions. It noted the following developments since its meeting in July 2015:
Overall inflation decreased in July 2015, and remained within the Government’s
target range of 2.5 percent on either side of the 5 percent target. Month-on-month
inflation eased to 6.6 percent in July 2015 from 7.0 percent in June 2015, mainly
reflecting lower food prices which offset the increase in fuel prices during the period
and pass-through effects of the depreciation of the Kenya Shilling. The month-on-
month non-food-non-fuel (NFNF) inflation increased marginally to 4.7 percent from
4.6 percent during the period.
The foreign exchange market was volatile in early July 2015, but has stabilised
reflecting in part the impact of monetary policy measures. In particular, Open Market
Operations and the sale of foreign exchange by the Central Bank of Kenya (CBK)
have stemmed the volatility and resulted in tight liquidity conditions. The current
account deficit has widened mainly due to imports of capital goods and lower
earnings from exports. Nevertheless, diaspora remittances have remained strong.
The CBK’s foreign exchange reserves stood at USD 6,413 million at the end of July
2015. This level of reserves together with the precautionary facility with the
International Monetary Fund provides an adequate buffer against short-term shocks.
Consistent with the policy stance adopted by the MPC in its July 2015 meeting,
overall liquidity conditions remained tight, with the interbank interest rate rising
above the Central Bank Rate (CBR).
The latest data indicates that the banking sector is resilient, though credit and
liquidity risks remain.
Global economic growth remains moderate with a projected gradual pickup in
activity in the remainder of 2015. However, the uncertainty around the timing of the
increase in U.S. interest rates, coupled with the fall in equity prices in China and the
debt crisis in Greece have led to heightened uncertainty and increased instability in
the global financial markets. Most currencies have remained volatile against the U.S.
The CBK’s Market Perceptions Survey of July 2015 showed optimism for increased foreign direct investment and recovery of key sectors of the economy. Early indications point to improved performance in tourism and agriculture.
The Committee concluded that the measures taken in the previous meetings were yet to be fully transmitted to the economy. In particular, the impact of the increase in the Kenya Banks’ Reference Rate (KBRR) takes effect from August 2015. The MPC therefore decided to retain the CBR at 11.50 percent in order to anchor inflation expectations. The CBK stands ready to use the instruments at its disposal to maintain overall price stability.