Kenya's apex bank retains benchmark lending rate at 8.5%

Kenya's central bank (CBK) on Tuesday retained the benchmark lending rate at 8.50 percent, but decried rising inflation sparked by VAT measures introduced in August. The bank said it will continue to monitor the key macroeconomic aggregates and any emergent risks that may impact on price stability. "The Committee therefore decided to retain the CBR at 8.50 percent and will also continue to work with stakeholders in order to improve the mechanisms for liquidity management," CBK Governor Njuguna Ndung'u said in a statement. Ndungi said the bank's monetary policy organ noted that the projected weak recovery in the global economy and the instability in the Middle East and North Africa continue to pose risks to the macroeconomic outlook. The recession in the eurozone has slowed down export earnings from tourism while the temporary partial shutdown of the U.S. government in October could affect diaspora remittances from North America in the short-term, the bank said. The governor said the new VAT measures had a one-off impact on inflation. "In particular, the 1-month annualized overall inflation was negative in October 2013, a clear indication that inflationary expectations had not changed relative to the pre-VAT Act period," the statement said. According to the CBK, there were also no demand-driven inflationary pressures which would require a revision of the current monetary policy stance. The overall month-on-month inflation declined from 8.29 percent in September to 7.76 percent in October. The decline in inflation in October largely reflected a fall in the prices of all energy items as well as some food items and the stable exchange rate that also contributed to the relative prices declining. The 1-month annualized overall inflation declined by 0.63 percent to 7.76 percent October and the non-food-non-fuel month-on- month inflation also decreased from 5.02 percent to 4.94 percent in the same period. The results are an indication of a moderation of inflationary pressure in the economy that also reflects the fact that inflationary expectations have not changed even after implementation of the VAT Act in September. Overall inflation declined in October but remained above the 7. 5 percent upper bound for the government's medium-term target, the bank said. In addition, the strengthening of the Kenyan shilling against major currencies in October moderated any impact of the pass- through effect of imported inflation, it added. "The Central Bank Rate (CBR) continued to coordinate movements in the short-term interest rates during the period," the statement said. Enditem