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Kenya Monetary Policy May 2019

Kenya: Central Bank holds rates in May meeting

At its meeting on 27 May, the Monetary Policy Committee (MPC) of Kenya’s Central Bank held the benchmark lending rate at 9.00%, where it has been since July 2018. The decision was widely expected by market analysts.

The Bank opted to keep the rate stable despite a surge in price pressures in April, as inflation remained within the 2.5%–7.5% target band and is projected to fall in the near-term. Weather conditions are seen improving and pushing down food prices, while reduced usage of costly power services should ease electricity expenses. Inflation climbed to 6.6% in April from 4.4% in March, with the persistence of drought conditions causing food inflation to soar. In spite of this spike, core inflation hovered below 5.0%, signaling the relatively subdued nature of demand pressures and the limited scale of spillovers from higher food and fuel costs. Moreover, with the current account deficit narrowing on resilient export growth, robust remittance inflows and flourishing tourism activity, there does not appear to be an imminent trigger for a depreciation in the shilling that would warrant the Central Bank to tighten its stance.

Devoid of substantive forward guidance, the accompanying communiqué suggests that the Bank will maintain its current stance. Inflation remains within target and inflation expectations are well anchored, while economic growth remains resilient and foreign exchange reserves robust. The Bank did, however, note that it would closely monitor the effect that possible spillovers from the recent upturn in food and fuel prices could have on inflation. FocusEconomics panelists, meanwhile, are divided on the Bank’s stance going forward.

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