Roundup: Kenyan economy remains strong with falling inflation, deficit

The performance of Kenya's economy remains strong following a growth of 5.6 percent in 2015, with declining inflation and deficit, according to the central bank.

The Kenyan central bank (CBK) on Monday lowered the benchmark lending rate by 100 basis points to 10.5 percent as part of efforts to check inflation and encourage more borrowing from banks.

The CBK's Monetary Policy Committee (MPC) said the Central Bank Rate(CBR) will allow policy space for an easing of monetary policy while continuing to anchor inflation expectations.

"The MPC noted that overall inflation is expected to decline and remain within the government target range in the short-term," CBK Governor Dr. Patrick Njoroge said in a statement issued in Nairobi after the meeting of the Bank's top monetary policy organ.

The Committee met in Nairobi on Monday to review recent economic developments, and the outlook for the domestic and global economies.

It noted that month-on-month overall inflation fell to 5.3 percent in April, from 6.5 percent in March, and was within the government's target range., largely due to reduction in the prices of food items and fuel.

According to CBK, month-on-month non-food-non-fuel (NFNF) inflation also declined to 5.8 percent in April from 6.0 percent in March.

The Consumer Price Index (CPI) category alcoholic beverages, tobacco and narcotics contributed 1.1 percentage points to NFNF inflation in April, reflecting the revised excise tax introduced in December 2015.

Significantly, the 3-month annualized NFNF inflation fell from 6.8 percent in March to 4.6 percent in April, indicating that there were no significant demand pressures in the economy.

According to Njoroge, the foreign exchange market has remained stable, supported by a narrower current account deficit due to lower oil imports, improved earnings from tea and horticulture exports, and strong diaspora remittances.

"The current account deficit was estimated at 6.8 percent of GDP in 2015, a reduction of 3 percentage points from 2014, and is expected to narrow further in 2016," he said.

The CBK said uncertainties in the global financial markets have increased due to risks posed by, among other factors, slower growth in China, the timing of the U.S. Fed's next increase in interest rates, and the outcome of the referendum on U.K. membership of the European Union (Brexit).

"However, the growth outlook for Kenya's main trading partners in the region remains strong, suggesting better prospects for exports performance," Njoroge said.

According to CBK, foreign exchange reserves currently stand at 7.67 billion U.S. dollars (equivalent to 5.0 months of import cover) up from 7.38 billion dollars (equivalent to 4.7 months of import cover) at the end of March 2016.

"These reserves, together with the Precautionary Arrangements with the International Monetary Fund (IMF) will continue to provide adequate buffers against short-term shocks," the MPC said.

The banking sector is resilient and has begun to stabilize following the successful and quick reopening of Chase Bank, which has enhanced confidence in the sector.

Njoroge said the CBK's enforcement of existing regulations particularly with respect to the classification of loans, has strengthened and increased transparency of the banking sector.

The apex bank said the performance of the economy remains strong, posting a growth of 5.6 percent in 2015, from 5.3 percent in 2014.

The MPC Market Perception Survey conducted in May 2016, shows that the private sector remains optimistic supported by macroeconomic stability, stronger agriculture performance, public infrastructure investment, and tourism recovery. Endit