The Monetary Policy Committee (MPC) took decisive action today, voting to raise the Central Bank Rate (CBR) from 12.5 percent to 13 percent amidst mounting inflationary pressures and global economic uncertainties.
Dr. Kamau Thugge, CBS, Chairman of the Monetary Policy Committee, announced the decision following the committee’s meeting on February 6, 2024.
Global economic conditions framed the MPC’s deliberations, with a backdrop of improved global growth and inflation, moderating oil prices, but heightened geopolitical tensions, especially in the Middle East. The Committee reviewed previous measures to mitigate economic impact and financial disruptions while considering projections for 2024 and beyond.
“The decision to raise the CBR reflects our commitment to stabilizing prices and ensuring inflation remains within our target range,” stated Dr. Kamau Thugge.
Kenya has witnessed an uptick in inflation, with overall inflation rising to 6.9 percent in January 2024, flirting with the upper bound of the Government’s target range. Factors such as increased fuel and food prices contributed to this uptick, posing challenges to monetary policymakers.
“The risks to inflation remain elevated in the near term,” Dr. Thugge noted, citing concerns about second-round effects of rising fuel prices and exchange rate depreciation.
Economic indicators present a mixed picture, with GDP growth standing strong at 5.9 percent in the third quarter of 2023, driven by robust performance in agriculture and services sectors. Optimism prevails in business circles, with CEOs and market surveys revealing improved sentiments buoyed by sectoral performance and government focus on key areas like agriculture and health.
However, challenges persist, including weakened consumer demand, currency depreciation, and high-interest rates. The current account deficit, though narrowing, remains a concern, projected at 4.0 percent of GDP in 2024.
The banking sector, while stable, faces ongoing pressures, with non-performing loans declining but remaining significant. Commercial bank lending to the private sector remains robust, reflecting sustained demand particularly in manufacturing, transport, and trade sectors.
In light of these factors, the MPC opted for a proactive stance, raising the CBR to 13.00 percent. This move aims to anchor inflation expectations and steer inflation towards the target range of 5.0 percent.
“The decision underscores our commitment to maintaining price stability while supporting sustainable economic growth,” affirmed Dr. Kamau Thugge.
The MPC’s decision will reverberate across the economy, impacting borrowing costs, investment decisions, and consumer spending. The Committee will reconvene in April 2024 to assess the efficacy of policy measures and recalibrate strategies as needed.
