Kenya: Central Bank keeps policy rate on hold
September 25, 2018
At its latest meeting held on 25 September, the Monetary Policy Committee (MPC) of Kenya’s Central Bank decided to keep the Central Bank Rate (CBR) steady at 9.00%. The Bank’s decision was in line with market expectations.
Sustained optimism on the economy’s growth prospects and well-anchored inflation expectations underpinned the Bank’s decision to stay put. Inflation dropped to 4.0% in August, down from 4.4% in July, remaining within the Bank’s 2.5%–7.5% target range. Lower food prices, which declined on favorable weather conditions, explain the fall in inflation and offset higher energy prices. The return to political stability following last year’s prolonged election cycle and improved weather conditions have fueled a rebound in agricultural output and a wider pick-up in economic activity. Moreover, stronger investor confidence should help lure in a higher level of foreign investment. These factors, along with the government’s “Big Four” agenda prioritizing investment in key sectors, have lifted business confidence.
Robust agricultural exports, healthy inflow of remittances, thriving tourism activity, and resilient private sector credit growth are expected to continue supporting growth. While the economy is expected to accelerate this year, the government will face challenges in meeting its fiscal targets given its “Big Four” agenda. Aimed at helping reduce the fiscal gap, the government has levied a new 8% value added tax on all petroleum products this month.
The Bank’s accompanying statement highlighted that there was need to monitor the impact of the VAT on petroleum products and that inflation expectations remained well-anchored within the target range. It went on to state that it would closely monitor developments in the global and domestic economy to inform the course of future monetary policy and stands ready to take any additional measures as necessary.
Kenya Interest Rate Forecast
FocusEconomics Consensus Forecast panelists expect the Bank Rate to end 2018 at 8.83%. For 2019, panelists project that the Bank Rate will be reduced to 8.70% by the end of the year.
Author: Nihad Ahmed, Economist