Kenya: Central Bank holds the main policy rate at 10.00% in September
September 18, 2017
The Central Bank maintained the main policy rate at 10.00% at its 18 September monetary policy committee meeting, in line with market expectations. The decision to keep the rate steady comes amid a bleak economic situation weighed down by heightened political tensions from a protracted election period and worsening drought.
Despite inflation having surpassed the Bank’s upper target bound of 7.5% in August, the Bank decided to hold the rate put. It was motivated by expectations of improved food supplies in anticipation of short rain spells and government aid measures, which are expected to reduce food prices going forward and hold off pressure on inflation. Food shortages due to a pre-election surge in demand and transport disruptions in the aftermath of the now-annulled 8 August presidential election triggered a rise in inflation to 8.0% in August from 7.5% in July. Demand pressures remain subdued, however, evidenced by a stable core inflation rate below 5.0%.
Higher inflation is seen as a temporary phenomenon that is expected to ease in the near term and return to the target range, motivating the Bank’s decision to maintain its stance. However, recent reports of lower rainfall failing to offer respite to the severe drought, raising alarms of a potential famine, cast a shadow of doubt over the Bank’s optimism and suggest a continued rise in inflation as disruptions to agricultural output persist. The drought, combined with ongoing tensions on the political front, have thrust Kenya’s economy into sustained turbulence. Despite optimism about the trajectory of inflation in upcoming months, with inflation remaining elevated and currently above the Bank’s target range of 2.5%–7.5%, the Bank is constrained and unable to lower rates to support a revival in growth, preferring an unchanged stance in order to anchor inflation expectations.
The Bank’s statement did not contain substantive forward guidance, only stating that future measures will hinge on the close monitoring of domestic and global developments. FocusEconomics Consensus Forecast panelists predict that rates will rise slightly towards the end of the year in order to keep inflation in check. An easing cycle is anticipated in 2018 as price pressures recede.
Author: Nihad Ahmed, Economist