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Kenya Monetary Policy May 2018

Kenya: Central Bank keeps rate on hold in May

At its latest meeting held on 28 May, the Central Bank of Kenya’s Monetary Policy Committee (MPC) kept the key rate at 9.50%, following a rate cut by 50 basis points at its previous meeting on 19 March. The Bank’s decision to keep the Central Bank Rate (CBR) on hold came against the backdrop of subdued inflation and more upbeat economic prospects.

With the political scene returning to stability after a prolonged election cycle and weather conditions improving, economic activity has picked up pace; the PMI climbed to the highest reading in 28 months in April, marking four consecutive months of an accelerated increase in private sector activity. A more rapid rate of expansion in private credit has also helped drive the upturn. That said, the cap on commercial bank lending rates, the timing of the removal of which is still uncertain, continues to restrain growth. Despite more buoyant conditions in the domestic economy, inflation has been on a downward trend since February and fell to 3.7% in April (March: 4.2%). April’s drop was largely due to lower food prices, which offset higher domestic energy prices emanating from rising global oil prices. Inflation expectations are also well anchored within the Bank’s 2.5%–7.5% target range.

While the Bank noted there was more room for accommodative monetary policy, with economic output remaining below its potential level and inflation falling, it assessed that the reduction of the rate in the previous meeting has yet to be fully transmitted to the economy. Furthermore, the Bank also noted it still needed to determine any potential negative impacts arising from the policy change. The MPC stated that it will continue to monitor developments in the global and domestic economy, including the rise in international oil prices, the pace of monetary policy normalization in advanced economies, and the looming trade war. The date of the next monetary policy meeting has yet to be decided.

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