Kenya’s Central Bank maintains policy rate at 8.75%

The Monetary Policy Committee of the Central Bank of Kenya has decided to maintain the Central Bank Policy rate at 8.75%. This decision comes after the tightening of monetary policy in November last year, which is still having an impact on the economy. Inflation in Kenya decreased to 9.1% in December 2022 from 9.5% in November 2022, although it is higher than the 5.7% recorded in December 2021. Analysts have described the Central Bank's rate-hiking cycle as reactionary rather than precautionary, a trend not unique to Kenya but observed in various economies worldwide. The tightening cycle began when the Central Bank Rate (CBR) was at 7% in May, with inflation standing at 7.1%. Subsequently, inflation spiked to 7.5% in June 2022, leading to a rate increase to 7.5%. This chasing continued as inflation rose to 9.2% in September 2022, prompting a further rate hike to 8.25%. In November 2022, inflation peaked at 9.5%, and the rate was raised to 8.75%. Mihr Thakar, an analyst and investor based in Kenya, highlighted how various factors have impacted inflation in the country. The inflationary pressures have been influenced by high inflation in developed countries due to ultra-easy monetary policies amidst the COVID-19 pandemic, supply disruptions from China and the Russia-Ukraine conflict, and ongoing droughts affecting food inflation in Kenya. Thakar stressed the need for targeted efforts to address challenges like low forest cover and food dependency on neighboring countries. Regarding the global trends affecting inflation in Kenya, Thakar pointed out that declining commodity prices and food price increases due to seasonal changes have contributed to lower inflation figures. The current trend could continue in 2023, supported by factors such as falling house prices in developed markets and more predictability in local weather patterns. Additionally, Thakar discussed the impact of fuel prices in Kenya, noting that beyond oil prices, currency depreciation is a crucial factor. The depreciating Kenyan shilling, which fell by over 8% in 2022, has impacted fuel prices locally. Despite the complexities in global economic dynamics related to events like the war in Ukraine and the lingering effects of the COVID-19 pandemic, the Kenyan government has chosen to let the exchange rate act as a shock absorber rather than deplete reserves rapidly. Looking ahead, the focus will be on how these economic factors, both local and global, continue to shape Kenya's inflation outlook and the broader economic landscape.