The Monetary Policy Committee (MPC) of the Central Bank of Kenya (CBK) on Wednesday maintained the benchmark interest rate at 10.50% for the second time under the leadership of the new Governor, Kamau Thuge. This decision comes in the wake of several significant economic indicators that have shaped the current monetary policy stance.
One of the primary reasons cited by the MPC for maintaining the interest rate is the stability observed in inflation figures. The committee noted that inflation is well within the target range and is expected to further decrease. This anticipated decrease is primarily attributed to the expected decline in food inflation. Additionally, the MPC highlighted the easing of inflationary pressures, particularly as Non-Food Non-Fuel (NFNF) inflation experienced a decline. Notably, the committee emphasized that the impact of the earlier monetary policy tightening, implemented in June 2023 to anchor inflation expectations, is still being transmitted throughout the economy.
This announcement took place amidst concerns regarding the depreciation of the Kenyan Shilling against the US Dollar. The exchange rate nearing the Sh150 mark raised concerns about its impact on the economy, particularly regarding imported goods. Several media reports highlighted that some commercial banks had already started selling US Dollars above the Sh150 level in Nairobi. This phenomenon added pressure to the Kenyan Shilling and threatened to trigger price increases in imported products such as electronics, fertilizers, and cars.
The official average exchange rate, as indicated by the CBK, stood at Sh143, in contrast to the actual trading rates observed on the ground, which were quoted by forex dealers. This discrepancy suggested a significant variance between official and market rates.
The latest figures on the Monthly Inflation Rate, measured using the Consumer Price Index (CPI), revealed a positive trend. The rate dropped to 7.3% in July 2023 from 7.9% in June 2023. This marked the second consecutive decrease since June and represented the lowest level in a year, reaching the rate last recorded in May 2022. The MPC commented that overall inflation is expected to continue moderating in the near term. This is attributed to lower food prices, primarily driven by improvements in the supply of key food items such as maize. Government measures to enhance sugar supply through imports were also identified as contributing factors.
Interestingly, the issue of rising sugar prices was highlighted in the context of household economic challenges. Sugar prices had surged in the retail market, impacting households’ financial situations. The scarcity of sugar in the domestic market, coupled with the closure of milling firms due to cane shortages, led to opportunities for licensed importers and unscrupulous merchants to reap profits.
Agricultural sector surveys conducted ahead of the MPC meeting indicated favorable trends for key food items, except sugar and onions. Respondents anticipated increased supplies in the coming months, particularly with the onset of harvests in certain regions of the country. Onion prices, however, experienced a sharp rise due to reduced imports from Tanzania, combined with local production challenges due to high costs and persistent drought conditions.