CBK raises lending rate to tame inflation, stabilise shilling

What you need to know:

The Monetary Policy Committee (MPC) was concerned that the gradual tightening which has been directing monetary policy has been based on the belief that the supply side problems would soon be resolved as had happened in previous, even worse, drought episodes.

The Committee carefully examined a broad array of available information and analyses that showed these developments are a threat to economic recovery and macroeconomic stability: second quarter growth declined to 4.1 percent.

Decisive and immediate action is required from the monetary policy side to stem these inflationary pressures, stabilize the exchange rate and re-establish a healthy growth base.

In a move seen to push up cost of bank loans, Central Bank of Kenya (CBK) has raised base lending rate by 4 percentage points to 11pc in a bid to tame inflation and stabilise the shilling.

CBK Governor Njuguna Ndungu said on Wednesday the Monetary Policy Committee (MPC) "will revise the CBR further if inflation and exchange rate volatility do not abate."

The MPC reached at the decision since "inflationary pressure has continued to increase and both the weakening of the shilling and its volatility poses additional threats."

"The Committee decided to raise the CBR by 400 basis points to 11.0 percent. In addition, the MPC will be meeting every first week of the month until further notice," says Prof Ngungu, who is also the MPC Chairman.

The Committee considered that an enhanced tightening of the monetary policy stance was required at this time but observed that this needed to be complemented by the ongoing actions on the supply side with respect to food, fuel and energy.

"The committee met to assess developments in the economy since the Special MPC Meeting held on 14 September, 2011. It reviewed the impact of its decision to tighten the monetary policy stance so as to rein in inflation and inflationary expectations," says Prof Ndungu in a statement.