The Central Bank of Kenya has increased the base lending rate by 100 basis points as inflation stayed above medium term target in May.
The central bank Monetary Policy Committee in its sitting stated that the move to tighten its monetary policy comes on the backdrop of sustained inflationary pressures which rose to 8 per cent last month from 7.9 per cent in April.
“The MPC concluded that there was scope for a further tightening of the monetary policy to anchor inflation expectations. The Committee, therefore, decided to raise the central bank rate (CBR) from 9.50 per cent to 10.50 per cent,” Dr Kamau Thugge, CBK Governor and Chair of MPC.
MPC further expects inflation rate to remain high in the near term on account of increased electricity prices following the upward review of electricity tariffs in April by the Energy and Petroleum Regulatory Authority and the removal of the fuel subsidy.
Fuel prices are further expected to rise from next month with the increase of Value Added Tax (VAT) on petroleum products from 8pc to 16pc.
However, despite risks emerging from the war in Ukraine and the tightening on monetary policy in advanced economies, the central bank expects strong economic growth in the first half of the year propped by the services sector and recovery in the agriculture sector.
The committee also noted a strong growth in the export receipts which has grown 5.5pc in a year to May 2023 supported by higher exports of tea and manufactured goods.
CBK says foreign exchange reserves of which currently stands at $7.4 billion which equals to 4.07 months of import cover provides enough buffers for short term shocks in the forex market.
This comes as the local currency continues with its free fall against the dollar, closing at a mean rate of 140.44 during Monday trade.
