The Central Bank of Kenya (CBK) on Wednesday retained the base lending rate at 7 per cent for the sixth time in a row shrugging off rising concerns over inflation.
The Monetary Policy Committee said it held the key rate - effectively sparing borrowers higher cost of loans - in an environment where inflation expectations were within the target range and the economy was on the road to recovery following initial disruption brought about by the Covid-19 pandemic.
"The Committee noted that the package of policy measures implemented since March 2020 were having the intended effect on the economy, and are being augmented by implementation of the announced fiscal measures in the financial year 2020/21 Budget", MPC chairman and CBK governor Patrick Njoroge said after its meeting.
"The MPC concluded that the current accommodative monetary policy stance remains appropriate, and therefore decided to retain the Central Bank Rate (CBR) at 7.0 per cent."
Credit to the private sector, the CBK said, grew by 8.4 per cent in the year to December compared to 7.7 per cent in October, which are both below the ideal growth level of between 12 and 15 percent to support economic development.
"Leading indicators for the Kenyan economy point to a recovery particularly in the fourth quarter of 2020, from the disruptions earlier in the year," noted Dr Njoroge.
"This recovery is supported largely by strong performance in the agriculture and construction sectors, resilient exports, and continued recovery in manufacturing and services," he said.
The Committee said the economy is expected to rebound strongly in 2021, supported by a recovery in the services sectors particularly education, manufacturing, agriculture and the ongoing policy support through the government’s economic recovery plan.
The prices of key food items have climbed significantly over the past couple of months, adding pressure on cash-starved households that are still reeling from the economic hit by the Covid-19 pandemic.
Data from the Kenya National Bureau of Statistics shows that the year-on-year rise in the cost of food stood at 7.2 per cent last December, the highest since June 2020.
"Inflation remains well anchored. Month-on-month overall inflation stood at 5.6 percent in December 2020 compared to 5.3 percent in November," said Dr Njoroge.
"The inflation rate is expected to remain within the target range in the near term, supported by lower food prices and muted demand pressures."
He, however, said the recently-introduced tax measures are expected to have "a modest impact on overall inflation."