The Central Bank of Kenya (CBK) retained the benchmark lending rate at 7.5 percent in an to the surprise of market expectation on the back of soaring inflation rate.
This is attributable to the retention of the fuel subsidy and the new unga subsidy.
“This increase was moderated by measures implemented by government to stabilise fuel prices, lower electricity tariffs, and subsidies on fertilizer prices,” the CBK noted in a statement on Wednesday.
“Additionally, the recent waiver of import duties and levies on white maize, the subsidy on retail prices of sifted maize flour, and the recent reduction on VAT on LPG will further moderate domestic prices.”
Going forward, the CBK has pointed to the gradual decline in global commodity prices as its base for the decision to abort a further interest rate hike from May.
In May, the reserve bank raised the CBR for the first time in nearly seven years as it begun what was then deemed as the start of an inflation fighting cycle.
“The MPC noted that international commodity prices, particularly oil, wheat and edible oils, had begun to moderate. These developments are expected to ease domestic inflationary pressures in the near term,” the CBK added.
The MPC observed its tightening of monetary policy in May had been timely in anticipating emerging inflationary pressures.
Inflation in June breached CBK’s upper target of 7.5 per cent from the culmination of a steady rise in food and fuel prices in the opening half of 2022.
Despite the tighter monetary policy, private sector credit growth has continued unabated touching a high 12.3 per cent in June from 11.5 per cent in April.
Strong credit growth has been observed in the sectors of transport and communication, manufacturing, trade and consumer durables.
“The number of loan applications and approvals remained strong, reflecting improved demand with increased economic activities,” the CBK stated.
In anticipating higher interest rates, the International Monetary Fund (IMF) had for instance expected the CBK to raise the rates to deal with secondary inflationary pressures as it expected the rate of inflation to remain above the target band in the short run.
“The Central Bank should stand ready to continue to adjust its stance to limit second-round effects from higher food and fuel prices to keep inflation well-anchored amid a temporary increase of inflation above the target band,” the IMF said last week.
On the opposite flank, banks and financial analysts had anticipated a further tightening to offer respite to a weakened Kenya Shilling which has so far lost five per cent in value against the US dollar this year.
