Central Bank of Kenya to consult IMF when it loses handle on inflation
Friday July 28 2023
Central Bank of Kenya Governor Kamau Thugge before the Departmental Committee on Finance and National Planning at County Hall on May 30, 2023. PHOTO | DENNIS ONSONGO | NMG
The International Monetary Fund (IMF) has revealed a monetary policy consultation clause with the Central Bank of Kenya as it seeks to have a bigger say in the decisions taken by Kenya's apex bank in its fight to contain runaway inflation.
In its latest report, the IMF says the Central Bank of Kenya (CBK) will consult with its executive board to set the monetary policy stance when the inflation rate persistently sticks above the 7.5 percent upper ceiling.
The clause, part of the ongoing arrangement between Kenya and the IMF, was first triggered in December after inflation stayed above 7.5 percent in the previous three months.
It was triggered again in June forcing the CBK to lift the benchmark interest rate, which is known as the Central Bank Rate (CBR), at an emergency monetary policy meeting.
Read: IMF: Kenya forex reserves to remain under pressure
“Inflation has remained outside our target band since June 2022, mainly driven by food and fuel prices. This led to non-observation of the programme’s Monetary Policy Consultation Clause (MPC), triggering a consultation with the IMF Executive Board,” CBK said in a letter attached to the IMF report.
The CBK is required to explain reasons why inflation has breached the upper limit and discuss with the lender potential policy responses and the outlook on inflation.
In December for instance, CBK told the IMF the main drivers of inflation were in part due to global shocks triggered by the war in Ukraine which affected the pricing of key commodities including fuel, wheat, edible oils, and fertilisers.
As part of policy responses, CBK noted it tightened monetary policy by increasing the CBR.
According to the CBK, monetary policy tightening would be complemented by fiscal measures taken to moderate the prices of specific commodities while it continues to monitor the drivers of inflationary pressures.
Read: Kenya raises key interest rate to tame inflation
CBK Governor Kamau Thugge told the IMF that inflation would steadily come down and return to the targeted band in months, even as food and fuel prices present persistent pressure.
“CBK expects overall inflation to decline in coming months, and its return to the target band is imminent. The rate of decline, will, however, depend on how food and fuel prices evolve in the period,” he said.
Dr Thugge was forced into a jumbo interest rate lift within 25 days of taking charge of the apex bank following downside inflation expectations in June.
On June 26, the MPC lifted the benchmark interest rate to 10.5 percent from 9.5 percent, leaving the CBR at the highest rate since July 2016.
Inflation has already handed Dr Thugge his first tough test as food and fuel prices pressure explodes by impacting the cost of non-food non-fuel commodities- core inflation.
“Inflation is almost like a tax because it reduces everybody’s real income. Therefore, it is very important that we address the inflationary pressures with the idea of reducing the cost of living, which is one of the issues that has concerned the country,” he noted.
Inflation eased slightly in June to 7.9 percent from eight percent in May, but consumer prices are expected to increase in July, largely from the implementation of higher VAT on petroleum products at the standard rate of 16 percent from eight percent.