Kenyan central bank raises rate to stabilize prices

The Central Bank of Kenya (CBK) on Tuesday increased its benchmark lending rate by 150 basis points from 8.50 percent to 10 percent in an attempt to support the falling shilling and stabilize inflation.

CBK's Monetary Policy Committee (MPC) meeting on Tuesday said raising the benchmark rate should lead to stabilization of domestic prices and enable banks to check liquidity.

The banking regulator, however, said the local currency remains vulnerable to the changing global risk perceptions and associated capital flows due to the uncertainty around the timing of the U.S. monetary policy tightening.

"The geopolitical situation in the Middle East is a risk to the stability of international oil prices and the overall price stability objective," CBK said in a statement issued after the meeting.

The CBK's top monetary policy organ met in Nairobi to review market developments and the outcomes of its previous monetary policy decisions.

The Committee noted that the decline in overall inflation in May was largely a reflection of significant decreases in the prices of a number of food items following the onset of the long rains.

However, overall inflation remained within the upper bound of the government target range of 2.5 percent on either side of the medium-term target of 5 percent.

Overall month-on-month inflation declined from 7.08 percent in April to 6.87 percent in May. The month-on-month food inflation declined from 13.42 percent to 13.20 percent in the period.

However, the month-on-month non-food-non-fuel (NFNF) inflation has risen over the last three months from 3.16 percent in March to 3.53 percent in April and 4.15 percent in May.

The three-month annualized overall and NFNF inflation measures also rose in May 2015. This increase mainly reflected inflationary pressure on tradable goods on account of the pass-through from the weakening of the Kenyan shilling against the U.S dollar.

The CBK said the exchange rate of the shilling against the dollar had remained under pressure, largely reflecting the stronger dollar in the global currency market, the widening current account deficit and sustained high demand for foreign exchange in April and May 2015. "However, the exchange rate has stabilized in response to the active monetary policy operations leading to the tight liquidity conditions in the interbank market," it said.

This, the apex banks said, has curtailed arbitrage activities between the interbank and foreign exchange markets.

In addition, CBK said the shilling strengthened against the Euro and has continued to display relatively less volatility compared with the major regional currencies.

"This has been supported by sustained foreign exchange inflows through diaspora remittances, which averaged 122.18 million dollars per month in the first four months of 2015, up from an average of 113.60 million dollars per month in a similar period of 2014," it said.

CBK said the level of foreign exchange reserves, together with the precautionary facility with the International Monetary Fund (IMF), provides a cushion for the foreign exchange market against any temporary shocks.

The on-going implementation of measures to improve the competitiveness of Kenya's exports, including increased investment in infrastructure, will facilitate the long-term stability of the exchange rate, it said.

"Growth is expected to remain resilient in 2015 supported mainly by private sector credit growth to key sectors of the economy, prudent macroeconomic policy and sustained public investment in infrastructure," said the statement. Endi