By Modupe Gbadeyanka
The Central Bank of Kenya (CBK) has announced the reduction of the nation’s benchmark interest rate by 50 basis points.
This cut in the interest rate was announced on Monday after the central bank’s Monetary Policy Committee (MPC) meeting held today.
Chairman of the committee, Dr Patrick Njoroge, disclosed that the rate, which was at 10 percent before the meeting, has been reduced to 9.50 percent.
“The MPC noted that inflation expectations were all anchored within the government range, the increased optimism for growth prospects in the economy, and that economic output was below its potential level.
“There, it concluded that there was scope for easing its monetary policy stance in order to support economic activity.
“Consequently, while noting the risk of perverse outcomes, the committee decided to reduce the Central Bank Rate (CBR) to 9.50 percent from 10 percent.
“The MPC will closely monitor impact of this change in its policy stance. Other developments in the domestic and global economy will also be observed, and the MPC stands ready to take additional measures as necessary,” Dr Njoroge said.
According to the MPC chairman, inflation fell month-on-month to 4.5 percent in February 2018 from 4.8 percent in January 2018, thereby remaining within the government target range.
He said this decline reflected lower food prices particularly for Irish potatoes, cabbages, and sugar. The decrease in food prices outweighed the increase in fuel prices as a result of the rise in international oil prices. Non-food-non-fuel (NFNF) inflation remained below 5 percent indicating that demand -driven inflationary pressures are muted.
He said overall, inflation is expected to be within the government target range in the near term mainly due to expectations of contained food prices following improved weather conditions.
Also, he said the foreign exchange market remains stable supported by a narrower current account deficit and improved investor confidence in the economy. The external current account deficit narrowed to 6.1 percent of GDP in the 12 months to January 2018 from 6.4 percent in 2017 reflecting strong performance in tea and horticultural exports, diaspora remittances, and tourism receipts.
According to the CBK Governor, the deficit is expected to narrow further to 5.4 percent of GDP in 2018 supported by continued growth in tea and horticulture exports, resilient diaspora remittances, and continued growth in tourism receipts.
“Additionally, the impact of higher international oil prices in 2018 is expected to be moderated by lower food and SGR-related imports,” he said.
He noted that the CBK foreign exchange reserves are at an all-time high of $8.832 million (5.9 months of import cover), up from $7.089 million (4.7 months of import cover) in January 2018, and continue to provide an adequate buffer against short term shocks in the foreign exchange market. The recently extended precautionary arrangement with the International Monetary Fund equivalent to $989.8 million, will provide an additional buffer against exogenous shocks.
