CBK shakes off inflation concerns to leave interest rates unchanged

 

By Kepha Muiruri For Citizen Digital

In Summary

• This is the 10th straight hold in the key lending rate following the advent of the COVID-19 pandemic early last year.
• The CBK has retaliated the current accommodating monetary policy stance remains appropriate in supporting the continued recovery of the economy.
• The CBK has brushed aside rising inflationary pressures both domestically and internationally.

The Central Bank of Kenya (CBK) has left the benchmark lending rate unchanged at seven per cent following its policy meeting on Tuesday.

This is the 10th straight hold in the key lending rate following the advent of the COVID-19 pandemic early last year.

In holding the rate, the CBK has retaliated the current accommodating monetary policy stance remains appropriate in supporting the continued recovery of the economy from depths of the pandemic.

In doing so, the CBK has brushed aside rising inflationary pressures both domestically and internationally noting inflation expectations remain anchored in the medium term range of 2.5 to 7.5 per cent.

The rate of inflation raced to 6.6 per cent last month driven largely by higher fuel and food costs, with the rate set to scale up further in the short run.

“Inflation pressures are expected to be elevated in the near term, mainly driven by increases in fuel and food prices, and the impact of the recently implemented tax measures. However, inflation is expected to remain within the target range with muted demand pressures,” the CBK noted.

Further, the reserve bank has doubled down on its expectations for a strong economic rebound this year as seen in leading economic indicators (LEIs) in the year so far.

The strong rebound is expected to nullify the 0.3 per cent economy contraction over the last calendar year, the first such contraction for the economy in nearly three decades.

“Leading indicators for the economy point to a strong GDP recovery in 2021, mainly supported by robust performance of construction, manufacturing, education, real estate and transport and storage sectors. The economy is expected to rebound in 2021, supported by the continued reopening of the services sectors, recovery in manufacturing, and stronger global demand,” the CBK added.

Private sector market perception survey by CBK’s Monetary Policy Committee (MPC) have revealed general optimism on economic prospects by businesses even as they sight headwinds including uncertainties over the pandemic, increased political activity and the impact of increased taxes on business performance.

During the month of August, private sector credit growth improved to seven per cent from a lower 6.1 per cent indicating of improved credit access by private sector business.

Meanwhile, the asset quality of banks has continued to improve with the ratio of non-performing loans (NPLs) easing further to 13.9 per cent in August from a higher 14 per cent in June.

The better asset quality has been anchored by improving repayments and recoveries from sectors including tourism, hotels & restaurants and construction.