CBK holds policy rate amid shilling, inflation pressure

Money Markets

The local unit is currently trading about Sh95 to the dollar compared to about Sh90 at the beginning of the year. PHOTO | FILE 

By GEOFFREY IRUNGU, girungu@ke.nationmedia.com

In Summary

• In April, the overall inflation hit 7.1 per cent.
• The Central Bank of Kenya said the depreciation of the shilling was actually a correction of a previous misalignment, showing that research on the exchange rate undertaken by an MPC member, Francis Mwega, last year had finally been taken into account.

The Monetary Policy Committee (MPC) of the Central Bank of Kenya has retained the benchmark interest rate at 8.5 per cent, signalling its priority to keep the price of money low but also downplaying concerns of rising inflation and the depreciating shilling.

The MPC, led by its vice-chairman Haron Sirima, held its meeting amid slowed economic growth, a weak shilling and inflation close to the upper limit of 7.5 per cent.

The committee was meeting for the first time since 2007 without a substantive governor in office following the exit of Prof Njuguna Ndung’u in early March.

READ: Monetary Policy Committee to meet without governor

The MPC showed it was more concerned about the economy, which slowed to 5.3 per cent in 2014 compared to 5.7 per cent the previous year. The local unit is currently trading about Sh95 to the dollar compared to about Sh90 at the beginning of the year. In April, the overall inflation hit 7.1 per cent.

The Central Bank of Kenya (CBK) said the depreciation of the shilling was actually a correction of a previous misalignment, showing that research on the exchange rate undertaken by an MPC member, Francis Mwega, last year had finally been taken into account.

Prof Mwega showed that the shilling was overvalued by 4.3 per cent, which is about the same value by which the currency has depreciated since the start of the year.

“The committee noted that the current value of the shilling to the US dollar had adjusted to the slight misalignment in line with fundamentals in the economy,” said the MPC in a statement signed by Dr Sirima.

The MPC added that the rise in inflation was caused by higher food prices on account of delayed rainfall. It concluded that price changes were not driven by demand in a manner that would warrant a change in the Central Bank Rate (CBR) which is the policy benchmark.

“The committee concluded that there were no demand-driven threats to inflation…. Consequently, the MPC decided to retain the CBR at 8.50 per cent and will continue to monitor any risks from the external and domestic economies that may impact on price stability.”

The CBR has been retained at 8.5 per cent since April 2013.

The committee said the recent change in the value of the shilling had its roots in the strong dollar in the global currency markets and seasonal demand by corporate entities associated with payment of dividends to foreign shareholders of the companies operating in Kenya.

However, the CBK said there were forex reserves amounting to $6.9 billion (Sh656 billion), enough to buy imports for 4.4 months against the statutory requirement of four months.

The reserves, together with the precautionary facility from the International Monetary Fund, will cushion Kenya against temporary shocks.