The National Treasury has maintained the country’s inflation target range at 2.5 to 7.5 per cent for a sixth year running.
The inflation target is measured by the 12 month increase in Consumer Price Index (CPI) as published by the Kenya National Bureau of Statistics (KNBS).
The affirmation comes at a time when the cost of living has risen above the preferred ceiling, pushed by higher food prices as a result of drought.
“The inflation target shall be five per cent, with a flexible margin of 2.5 per cent on either side in the event of adverse shocks,” says Treasury secretary Henry Rotich in a notice to the CBK on the price stability target and economic policy of the government.
“The flexible margin of 2.5 per cent on either side of the inflation target is to cater for effects of external shocks such as oil price variations and domestic shocks particularly weather related ones. This will help preserve macroeconomic stability and reduce undesirable fluctuations in economic performance.”
Under Treasury current inflation targeting regime, when inflation heads above target, the CBK would generally interpret that as a signal higher interest rates are required to cool the economy.
Likewise, inflation heading below target usually signals lower rates are needed. The whole framework assumes a predictable relationship between inflation and output.
CBK’s base lending rate has been held at 10 per cent since September last year and is the main pricing tool for bank customer loans following the enactment of legislation capping rates in August 2016.
This is in spite of inflation rising to as high as 11.7 per cent this year (in May), due to high food prices caused by a prolonged drought.
Kenya’s annual inflation rose to 8.04 per cent last month from 7.47 per cent in July, according to the Kenya National Bureau of Statistics (KNBS).