The Central Bank of Kenya (CBK) Tuesday retained the base lending rate at nine percent, shrugging off rising concerns over the shilling, which has depreciated by 1.72 percent to the dollar in the past two months.
Current foreign exchange reserves of $8.03 billion (Sh824 billion) or equivalent to 5.3 months of import cover are sufficient to cover any foreign exchange shocks, the Monetary Policy Committee (MPC) said at the end of its last sitting this year.
The decision is also seen as a vote of confidence in the currency despite the International Monetary Fund’s (IMF) recent pronouncement that the shilling is overvalued by up to 17 percent.
“The CBK foreign exchange reserves continue to provide adequate cover, and a buffer against short-term shocks in the foreign exchange market,” CBK governor Patrick Njoroge said in a statement.
The CBK has also stayed positive in its outlook despite the September expiry of the $989.8 million precautionary facility it had with the IMF.
Fall in inflation
In holding the base rate steady, the MPC also cited last month’s fall in inflation to 5.3 percent from 5.7 percent in September, mainly driven by lower food prices that offset the increase in fuel costs.
“Looking forward, overall inflation is expected to remain within the target range in the near term, mainly due to expected lower food prices reflecting favourable weather conditions, the decline in international oil prices, and the recent downward revision in electricity tariffs.”
It was expected that with inflation fears out of the way, the CBK was always likely to adopt a wait and see attitude towards the shilling even though it has oscillated within a wider band in the past month compared to the previous 10 months of the year.