25 April 2014

Kenya: Govt Seeks Better Ways to Stabilise Prices

KENYA'S monetary policy framework will be revised for transparency and precision in order to meet the government's inflation targets and rein in high cost of living.

National Treasury Cabinet Secretary Henry Rotich said that the new framework will involve "inflation targetting" whereby a desired rate is set by the government and then the Central Bank through its monetary policy setting function, works towards achieving that target.

"It just means that if you want an inflation of five per cent work on your monetary operations to achieve that target rather than working on your monetary policy targeting your money and you are not sure whether you will meet that target of five per cent or not," explained CS Rotich.

At present, the government, through CBK's monetary policy committee seems to react to maintaining price stability once inflation figures are given by the Kenya National Bureau of Statistics.

Rotich said that while the current monetary framework in a way works around inflation targeting, it is still not as effective because it is not formalised. This, he said, will be addressed when the ongoing review of the Central Bank legistlation is finalised.

"We have about 80 per cent of the inflation targeting framework done and it should be easy to set a date for that as soon as we have the legislation," said the CS.

"It just makes it more transparent ... you work on your monetary operations to achieve that target. Here we will be giving them a target, the target is this, meet it do whatever you want to do, using the instruments they have in terms of mopping money in the economy and influencing the interest rates through the CBR (Central Bank Rate)," added Rotich.

The idea works on the principle of setting inflation forward then working towards ensuring that the targeted rate is met through a certain monetary policy direction.

Central Bank of Kenya's deputy governor Haron Sirima said the bank which is charged with monetary policy formulation has scaled up its analytical capacity for forecasting the path of inflation to make the policy tighter.

Rotich added that the ongoing "serious" discussions on inflation targetting will be the solution to ensuring price stability through an effective monetary policy.

The CBK's monetary policy committee meets every two months to review market developments and set the CBR which is a major influence on borrowing costs from local banks. The current CBR stands at 8.5 per cent and was set in the MPC's last meeting in March.


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