Kenya: Central Bank surprisingly leaves interest rate unchanged in August
August 5, 2015
At its 5 August monetary policy meeting, the Central Bank of Kenya surprisingly decided to keep the Central Bank Rate (CBR) at 11.50%, which contrasted the expectations of market analysts, who had projected a rate hike to 12.00%. In the two previous meetings, in June and July, the Central Bank lifted the CBR by a cumulative 300 basis points in order to fight high inflation amid a depreciating Kenyan shilling. Prior to June’s meeting, the CBR had been resting at 8.50% for over two years.
The Central Bank kept the CBR on hold to allow the recent monetary tightening to take effect, as in the Bank’s view the two recent rate hikes are, “yet to be fully transmitted to the economy.” In addition, the Central Bank stated that inflation moderated in July to 6.6%, as lower prices for food partially compensated for higher fuel prices and the pass-through effect of a weak shilling. As a result, in July, inflation moved somewhat closer to the center of the Central Bank’s inflation target range of 2.5 percentage points around its 5.0% target.
In its accompanying statement, the Bank added that the foreign exchange market was volatile in the beginning of July. On 20 July, the shilling depreciated to a nearly-five-year low of 102.6 KES per USD. This was 4.2% weaker than on the same day in June and represented a 16.8% depreciation over the same day of the previous year. However, the Bank stated that the currency had stabilized thereafter, partly owing to the Central Bank’s intervention in the foreign exchange market and tightening of liquidity conditions. In fact, on 11 August, the shilling strengthened to 101.1 KES per USD. While the Bank noted that the current account deficit continued to widen in July amid lower export revenues and rising imports of capital goods, it said that diaspora remittances were solid. Moreover, the Central Bank emphasized that its level of international reserves as well as a precautionary facility with the IMF provided adequate buffers against external shocks. The next monetary policy meeting is set for September.