Kenya’s central bank holds benchmark interest rate at seven percent

The Kenyan central bank sits in central Nairobi, Kenya, on Thursday, Feb.10, 2011. Kenya's current-account deficit widened to $1.92 billion in the year through October from $1.75 billion a year earlier following increased imports and reduced short-term flows, the central bank said. Photographer: Trevor Snapp/Bloomberg via Getty Images

The Central of Bank of Kenya (CBK) on Monday announced it will maintain its benchmark lending rate at seven percent.

In a statement, the CBK’s Monetary policy committee (MPC) attributed the move to the existing accommodative monetary policy stance remaining appropriate. The MPC also retained the Central Bank Rate (CBR) at seven percent at its September meeting.

FILE PHOTO: The Kenyan central bank in Nairobi, Kenya. /Getty Images

The committee also said inflation expectations remained within the targeted range as overall inflation went down to 6.5 percent last month compared to 6.9 percent in September. This, the MPC, said was due to lower fuel prices. Fuel inflation also went down to 9.6 percent in October from 11.1 percent in September as a result of the government’s attempt to stabilize fuel prices.

In October, Kenya’s energy regulator reduced prices by Sh5 per litre (slightly less than $0.05), in its monthly review. The reduction came in the wake of an intervention by government which saw the Energy and Petroleum Regulatory Authority (EPRA) directed to reduce fuel prices despite a shortage of funds that had been used to keep prices low since March.

Though food inflation dropped by 0.1 percent to 10.6 percent in October depressed rainfall on some food items, the MPC noted that it remained “elevated” due to depressed rainfall on some food items.

“Inflation is expected to remain within the target range in the near term with muted demands,” the MPC said.

Meanwhile, leading economic indicators showed a “robust” performance with recent statistics of the country’s gross domestic product (GDP) pointing towards a strong rebound in the first half of this year with the easing of COVID-19 restrictions.

“In particular, real GDP grew by 10.1 percent in the second quarter of 2021 compared to a contraction of 4.7 percent in the second quarter of 2020. This reflects the strong recovery of the services sector particularly in transport and storage, education, information and communication, wholesale and retail trade, and the improved performance of the construction and manufacturing sectors.”

In this regard, exports rose by 10.8 percent between January and October this year compared to a similar period last year with horticulture and manufactured goods recording increases of 19.1 percent and 35.1 percent respectively.

Remittances were also strong at $337.4 million in October recording a 20.1 percent increase between the period January-October 2021 compared to a similar period in 2020 and the banking sector remained “stable and resilient, with strong liquidity and capital adequacy ratios”.

The MPC also predicted economic growth to remain strong in 2022 on the back of normalization of economic activities in addition to an easing of global supply chain restrictions and stronger global demand.

The private sector also grew by 0.8 percent from seven percent in August to 7.8 percent in October with strong credit recorded in manufacturing, transport and communication business services and durables.

While a survey for the MPC meeting showed increased optimism among Kenyans about economic growth, there were concerns about the prevailing dry weather and an increase in political activity with the elections less than a year away.

The MPC will next meet in January 2022, but, the CBK said, will remain prepared to reconvene if such a situation warranted the need to.