Kenya's central bank held its benchmark Central Bank Rate (CBR) steady at 11.50 percent, saying previous rate hikes were continuing to bring inflation nearer to its 5.0 percent target but "the persistent turbulence in the global financial markets remain a risk to the inflation outlook, and its impact on the exchange rate should be monitored."
The Central Bank of Kenya (CBK), which has raised its rate by 300 basis points this year, added that it was holding its rate steady to anchor inflation expectations and was "ready to use the instruments at its disposal to maintain overall price stability."
Last week the International Monetary Fund said the central bank had acted appropriately raising its rates as this will help contain the impact of the shilling's depreciation on inflation and the country's economy remains on track despite headwinds from market volatility and challenges to security.
In August Kenya's inflation rate eased to 5.84 percent from 6.62 percent in July.
The Central Bank of Kenya issued the following statement:
"The Monetary Policy Committee (MPC) met on September 22, 2015, to review market
developments and the outcomes of its previous monetary policy decisions. It noted that
the monetary policy measures taken in the previous meetings were being transmitted into
the economy. The MPC noted the following developments since its meeting in August
Overall month-on-month inflation decreased to 5.8 percent in August 2015, from 6.6
percent in July, moving closer to the 5 percent target. Month-on-month non-foodnon-fuel
inflation reversed its upward trend since April, falling to 4.5 percent in
August from 4.7 percent in July. The decrease in inflation was due to lower food
prices and moderating demand pressures, partially offsetting the pass-through effects
of exchange rate movements.
The foreign exchange market was volatile in August and early September largely
reflecting international developments, in particular the impact of the devaluation of
the Chinese Yuan and continued strengthening of the U.S. dollar against most
currencies. However, the tight liquidity conditions and direct interventions by the
Central Bank of Kenya (CBK) helped stabilise the market. The current account
deficit narrowed slightly in July 2015, due to a slowdown in imports and improved
exports. In addition, diaspora remittances remain strong.
The CBK’s foreign exchange reserves stand at USD6,183.6 million, which together
with the Precautionary Arrangements with the International Monetary Fund (IMF)
continue to provide an adequate buffer against short-term shocks. Following the first
review of these Arrangements in September, the IMF endorsed the country’s
macroeconomic policies and the measures adopted to address the spillover effects of
the volatility in the global markets.
Consistent with the monetary policy stance, liquidity conditions remained tight with
the average interbank interest rate above the Central Bank Rate (CBR).
Consequently, other short-term interest rates have been rising.
The banking sector is resilient although liquidity and credit risks remain. The CBK is
closely monitoring the sector in view of the risks posed by volatility in the global
Global economic growth remains moderate supported mainly by the U.S. economy.
However, the slowdown in China has dampened the growth outlook for the global
economy and increased volatility in the financial markets. Most emerging and frontier
market currencies have depreciated against the U.S. dollar mainly due to the
uncertainty around the timing of the increase in U.S. interest rates.
The CBK’s Market Perceptions Survey of September 2015 showed that private sector
firms expect stronger growth in 2015 compared to 2014, supported mainly by public
investment in infrastructure and improved confidence in the economy. In addition, the
Survey showed that inflation was expected to be stable in the remainder of 2015
supported by lower food and oil prices. However, the forecasted El Niño rains could
disrupt food supply chains and exert pressure on food prices in the short term.
The Committee observed that the measures taken in the previous meetings had continued
to bring inflation nearer to the 5 percent target. However, the persistent turbulence in the
global financial markets remain a risk to the inflation outlook, and its impact on the
exchange rate should be monitored. The MPC concluded that the current monetary
policy stance and supporting measures remain appropriate. The Committee 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."