NAIROBI, Kenya, Jun 5 – The Monetary Policy Committee (MPC) has chosen to retain the Central Bank Rate (CBR) at 18 percent for the sixth month running, citing the need to sustain stability in the face of external shocks.
Despite inflation easing further to 12.22 percent this month, the struggling shilling proved to be the deal breaker for the market’s high expectations for a cut. Last week the local unit hit a four-month low of Sh87.90 against the greenback.
Following its evaluation of its monetary policy stance from the previous month, the MPC concluded that the global foreign exchange markets witnessed a resurgence of turbulence in May 2012 mainly attributed to the instability in the Euro Zone, hence the decision to hold the CBR.
“As a consequence, the US Dollar has strengthened globally as investors shift from Euro to US dollar denominated assets. Several emerging market currencies and those in the region, including the Kenya shilling, weakened against the US dollar as a result of these developments,” MPC Chairman and Central Bank Governor Njuguna Ndung’u explained in a statement.
The recent support from the $600 million syndicated loan he added improved the CBK foreign exchange reserves position and provided a further cushioning against external shocks affecting the exchange rate.
However, with the shilling remaining vulnerable to external shocks due to the current account deficit that stood at 11.4 percent of GDP last month and the instability in the Euro Zone, pass-through effects to domestic inflation are a major factor that could further weaken exchange rate.
Although international crude oil prices declined, the oil import bill still continues to account for a large proportion of the current account deficit with local oil prices remaining high.
“Despite the enhanced Open Market Operations undertaken in May 2012, excess liquidity conditions have persisted in the market thereby posing a risk to demand driven inflation pressure and exchange rate stability,” Ndung’u added.