Speaking after its meeting on Tuesday, the CBK Monetary Policy Committee said the controlled inflation rates and government domestic borrowing also led to the decision.
“Although overall month-on-month inflation rose from 6.02 percent in July 2013 to 6.67 percent in August 2013, it remained within the target band set by the government,” CBK Governor Njuguna Ndung’u who chairs the MPC said in a statement.
The increase in overall inflation was largely an outcome of a base effect following notable price declines in 2012, coupled with increases in fuel and some food prices.
“The exchange rate fluctuated within a narrower range of Sh87.37 and Sh87.70 against the dollar in August 2013 compared to a range of Sh85.83 and Sh87.41 in July 2013,” Ndung’u said.
The committee noted that the ongoing initiatives by the government to attract foreign investors and expand its trade markets would support exchange rate stability through increased foreign exchange earnings in the future.
Movements in short-term interest rates were aligned to the CBR while sustained Open Market Operations continued to support the stability in the inter-bank market. Commercial banks’ average lending interest rates declined between May and July 2013 to an average of 16.31 percent in line with the current monetary policy stance.
The committee noted that confidence in the economy has been maintained.
Activity at the Nairobi Securities Exchange (NSE) remained strong while foreign investor participation increased in August 2013.
In addition, the MPC Market Perceptions Survey conducted in August 2013 showed that the private sector expects inflation and the exchange rate to remain stable.
The survey also indicated optimism for strong economic growth in 2013 largely on account of macroeconomic stability and expected inflows of foreign direct investments.
However, the MPC noted that there remain risks to the macroeconomic outlook emanating from the global economy.
Furthermore, implementation of the new VAT measures from will contribute to short-term increases in inflation, but says the effects will be mild.