Kenya: Central Bank keeps main policy rate at 10.50% in July
July 25, 2016
The Central Bank of Kenya (CBK) kept its main policy rate, the Central Bank Rate (CBR), at 10.50% on 25 July after having cut it by 100 basis points in May. July’s decision to hold the CBR mainly aimed to keep inflation in check. A temporary rise in food prices caused inflation to increase in June, while July’s surge in fuel taxes will likely add to inflationary pressures in the coming months. The CBR decided to slash the Kenya Banks’ Reference Rate (KBRR) from 9.87% to 8.90% in an effort to reduce borrowing costs for the private sector. Banks use the KBRR to set their lending rates.
Concerning price developments, the CBK pointed out that inflation had risen from 5.0% in May to 5.8% in June, mainly reflecting a transitory spike in food prices. Going forward, the Bank sees that July’s hike in the fuel tax will temporarily push up inflation, but this will still rest within the CBK’s target range of 5.0% plus/minus 2.5 percentage points. Moreover, the Bank stated that the exchange rate was broadly stable—sustained by a lower oil import bill, higher tea and horticulture exports, as well as robust remittances—and that foreign currency reserves had increased to an amount that will cover over five months of imports in July. In the CBK’s view, solid reserves and the IMF’s precautionary arrangement offer adequate buffers against potential external shocks. The Bank also pointed out that there were signs that Kenya’s banking sector had become more stable in June, as liquidity conditions improved and the level of non-performing loans stabilized.
Regarding fiscal developments, the CBK expects the government’s planned spending increase in areas such as infrastructure, irrigation projects and security to improve Kenya’s business environment and help curb inflation in the medium term. At the same time, the Bank strongly warned that the government’s proposed measures to bring down high borrowing costs in the private sector could, “lead to inefficiencies in the credit market, promote informal lending channels, and undermine the effectiveness of monetary policy transmission.” The Bank was positive about Kenya’s GDP growth, stating that Q1’s solid expansion was broad-based, with all sectors of economic activity recording gains, including tourism which had long struggled due to security concerns. However, in the Bank’s view, risks to global growth have increased since the UK’s Brexit vote.