Kenya's central bank left its Central Bank Rate (CBR) unchanged at 11.50 percent to anchor inflation expectations further and enhance the credibility of its policy stance.
The Central Bank of Kenya (CBK), which raised its rate by 300 basis points in 2015 in response to a plunge in the shilling's exchange rate, added the global economic outlook had weakened since its previous meeting in January but the impact of volatility in financial markets and heightened uncertainty in emerging markets and advanced economies "is expected to be minimal due to the diversification of its export products and markets, and stable financial linkages."
Since September last year, the shilling's exchange rate has been relatively stable, with the central bank attributing this to a narrowing of the current account deficit on improved exports, strong diaspora remittances and a lower bill for oil imports.
The shilling was trading at 3.85 to the U.S. dollar today, little changed from 3.82 at the start of this year, but down 17 percent since the end of 2014.
The CBK's foreign exchange reserves rose to US$7.379.3 billion, or 4.7 months of imports, up from $7.023.7 billion at the Jan. 20 meeting of the bank's monetary policy committee.
On March 14, the new 2-year International Monetary Fund precautionary arrangement of $1.5 billion was approved, providing additional buffers against short-term shocks and reflecting confidence in Kenya's macroeconomic policies, the bank said.
Kenya's inflation rate eased to 6.84 percent in February from January's 7.78 percent, within the government's target range of 2.5 to 7.5 percent around a midpoint target of 5.0 percent.
Inflation is forecast to average 6.7 percent this year and 6.1 percent in 2017, underpinning expectations by economists that the CBK will cut rates in the second half of this year.
The CBK said the government's revised budget estimates, currently before the National Assembly, should continue to ease pressure on domestic borrowing and interest rates. Last month the country's Treasury revised down its borrowing requirement by 53.3 billion shillings to 168 billion.
The Central Bank of Kenya issued the following statement:
"The Monetary Policy Committee (MPC) met on March 21, 2016 to review market
developments and the impact of its previous monetary policy decisions. The Committee
noted the following developments:
Month-on-month overall inflation fell to 6.8 percent in February 2016, from 7.8
percent in January, thereby returning to within the Government’s target range of 2.5
to 7.5 percent. This decline was largely driven by developments in food and fuel
prices. The month-on-month non-food-non-fuel (NFNF) inflation rose to 5.9 percent
in February from 5.5 percent in the previous month, reflecting the revised excise tax
on alcoholic beverages and tobacco products, implemented in December 2015. The
contribution to NFNF inflation of the CPI category “alcoholic beverages, tobacco
and narcotics” remained unchanged at 1.1 percentage points, mainly due to the
revised excise tax.
The foreign exchange market has remained stable even as the global markets were
volatile due to pressures from China’s financial markets, and uncertainties in the
advanced economies. Developments in the foreign exchange market are supported by
a narrowing current account deficit with improved exports, strong diaspora
remittances, and a lower oil import bill.
CBK’s foreign exchange reserves currently stand at USD7,379.3 million (equivalent
to 4.7 months of import cover) up from USD7,023.7 million (equivalent to 4.5
months of import cover) at the last MPC Meeting. The approval on March 14 of new
IMF Precautionary Arrangements amounting to USD1.5 billion (SDR1.06 billion)
covering 2 years, reflects confidence in the country’s macroeconomic policies and
provides additional buffers against short-term shocks.
The revised Budget Estimates of the National Government, currently before the
National Assembly, indicate a planned reduction in Government expenditures which
should continue to ease pressures on domestic borrowing and interest rates.
The banking sector remains stable and resilient. However, the CBK continues to
closely monitor the sector, particularly concerning credit risk as reflected in an
increase in non-performing loans. Liquidity in banks and its distribution has
normalised, but further work is needed to strengthen liquidity management and
operations of the interbank market.
Average commercial banks’ lending rates declined to 17.9 percent in February 2016,
from 18.3 percent in December 2015. The CBK continues to urge banks to reduce
their operating costs and enhance transparency in the pricing of credit. In this respect,
the CBK has commenced the quarterly publication of individual banks’ lending rates
across loan categories and maturities.
The MPC Market Perception Survey conducted in March 2016, shows that the private
sector maintains its optimism for improved business conditions and high growth in
2016. These sentiments are underpinned by macroeconomic stability, continued
public investment in infrastructure, and the improved performance of agriculture,
especially horticulture and tea.
The global economic outlook has worsened since January 2016, with weaker growth
prospects, increased volatility in the financial markets, and heightened uncertainties
in the emerging markets and advanced economies. However, the impact of these
developments on Kenya is expected to be minimal due to the diversification of its
export products and markets, and stable financial linkages.
The Committee noted that the monetary policy measures currently in place have
continued to moderate inflation expectations. The MPC decided to retain the CBR at its
current level of 11.5 percent, to continue to anchor inflation expectations and enhance
the credibility of its policy stance. The CBK will continue to monitor developments and
will use the instruments at its disposal to maintain overall price and financial sector