The Monetary Policy Committee (MPC) is set to meet today to review the outcome of its previous policy decisions and recent economic developments and to decide on the direction of the Central Bank Rate (CBR).
In their previous meeting held on Wednesday, 29th March 2023, the committee decided to raise the Central Bank Rate by 75.0 bps to 9.75% from the previous 8.75%, citing that the scope to raise the rate was mainly due to the sustained inflationary pressures, the elevated global risks, and their potential impact on the domestic economy.
Read more: Kenya Bankers Association Recommends Keeping The CBR Rate Unchanged
The main goal of monetary policy is to maintain price stability and support economic growth by controlling the money supply in the economy. With more money supply in the economy, the demand for goods and services rises, leading to an increase in prices and, consequently, inflation.
Banks and other financial institutions increase their loan interest rates when the MPC increases the CBR rate. Consequently, due to the high-interest rates on loans, the demand for loans reduces, and ultimately the supply of money in the economy reduces, which reduces the inflation rate.
Read more: Government in talks with CBK to avert dollar shortage crisis
At the same time, declining demand for loans means that businesses are neither expanding their operations nor creating jobs, which leads to a slowdown in economic growth. Reducing the CBR rate has the opposite effect of stimulating a country’s economic growth and increasing the inflation rate, as it increases the supply of money in the economy.
Therefore, adjusting the CBR rate is a double-edged sword, and the MPC committee has to find a balance between which elements to trade-off. The Kenyan economy recorded 4.8% growth in 2022, compared to a 7.6% expansion in 2022. Therefore, increasing the CBR rate may stifle economic growth. While at the same time, the inflation rate for the last 3 months has been above the target range of 2.5% -7.5%, with the inflation for the Month of April coming in at 7.9%
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