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mINDIVIDUALLY P.OLICY C.OMITTEE mEETING
The Monetary Policy Committee (MPC) met on September 28, 2021 amid the ongoing global COVID-19 (coronavirus) pandemic, the continued roll-out of vaccination programs, and other measures taken by authorities around the world to curb its spread and impact . The MPC reviewed the impact and results of the measures taken to contain the negative economic impact and financial disruption from the pandemic.
- Headline inflation was 6.6 percent in August 2021, down from 6.5 percent in July, mainly driven by rising fuel and food prices. Fuel inflation remained high at 9.2 percent, largely due to the impact of the rise in international oil prices. Food inflation rose from 9.1 percent to 10.7 percent, mainly due to higher prices for tomatoes, cabbage, Irish potatoes, cooking oil (lettuce), beef on the bone and bread. This was mainly attributed to dry weather conditions and delivery bottlenecks. Inflationary pressures are expected to increase in the short term, mainly due to rising fuel and food prices and the impact of recently introduced tax measures. However, inflation is expected to remain within the target corridor with subdued demand pressures.
- The global economy will continue to recover in 2021, largely aided by the continued use of vaccines, easing the COVID-19 containment measures and travel restrictions, as well as strict policy measures. However, the pace of the global economic recovery remains inconsistent between countries and depends on the distribution of vaccines in regions and the development of the pandemic, especially after the resurgence of new variants. In addition, inflation has risen sharply in some major economies and emerging markets, mainly due to the rise in global oil prices, supply chain bottlenecks, and weather-related factors.
- The recently released Business survey 2021 using the re-based national accounts data show that the Kenyan economy contracted 0.3 percent in 2020. This performance reflects the negative impact of the COVID-19 pandemic, which affected activities primarily in the service sectors, particularly wholesale and retail, education, hospitality, and transportation and storage. However, leading indicators for the economy point to a strong GDP recovery in 2021, largely driven by robust development in the construction, manufacturing, education, real estate, and transportation and storage sectors. The economy is expected to recover in 2021, aided by the continued reopening of the service sector, recovery in manufacturing and stronger global demand.
- The MPC’s Private Sector Market Perceptions Survey, CEOs Survey and Survey of Hotels showed general optimism about the economic growth outlook for 2021. Respondents attributed this optimism to the ongoing business recovery amid the easing of the COVID-19 containment measures and increased vaccinations. Additionally, respondents were optimistic that the business outlook would improve in the fourth quarter of 2021 due to the expected increase in consumer demand related to the holiday season. Nonetheless, respondents remained concerned about the ongoing uncertainties surrounding the pandemic, the impact of increased taxes on business performance and increased political activity. The survey of hotels showed a sustained recovery,
practically all of the hotels surveyed are now in operation and report improved bed occupancy and increased restaurant and conference service.
- Goods exports remained strong and increased by 11.5 percent in the period from January to August 2021 compared to a comparable period in 2020. Income from the export of horticultural and industrial goods rose in the period from January to August by 25.0 percent or 39, 1 percent in 2021 compared to a similar period in 2020. However, tea export revenue declined 5.8 percent, in part due to the impact of accelerated purchases in 2020. Goods imports rose 22.9 percent in the January through August 2021 period versus a similar period in 2020, mainly due to the increase in imports of oil and other intermediate goods. Tourism and transport service revenues have improved with the relaxation of travel restrictions. Remittances remained robust at $ 313 million in August 2021 and were 19.2 percent higher in January-August 2021 than a similar period in 2020. The current account deficit is set to rise to 5.5 percent in the 12 months to August of GDP and is forecast for 2021 at 5.2 percent of GDP.
- The CBK foreign exchange reserves of currently USD 9,450 million (5.78 months of import cover) continue to provide adequate cover and a buffer against short-term shocks in the foreign exchange market.
- The banking sector remains stable and resilient with strong liquidity and equity ratios. The ratio of gross non-performing loans (NPLs) to gross loans were 13.9 percent in August, compared with 14.0 percent in June. Repayments and recoveries were recorded in the tourism, catering and hotel and construction sectors. In response to customer demand for products and services anytime, anywhere, banks have expanded their digital initiatives. In particular, bank transactions on cell phones have increased from 55.7 percent before the pandemic to 84.8 percent of all transactions currently.
- Private sector lending growth rose to 7.0 percent in August 2021, from 6.1 percent in July. Strong credit growth was observed in the following sectors: transportation and communications (11.8 percent), manufacturing (9.3 percent), finance and insurance (7.7 percent), business services (5.8 percent) and consumer durables ( 20.1 percent). The number of loan applications increased in August, driven by improved demand and increased economic activity. Progress was also noted in lending under the loan guarantee system that went live in October 2020.
- The Committee noted the progress made in the implementation of the 2021/22 budget and, in particular, the improved revenue development with the continued recovery of economic activity. The role from the Economic stimulus program and Economic recovery strategy were also noted and should boost domestic demand.
The committee found that inflationary pressures at home and abroad are increasing, although inflation expectations remain anchored in the target corridor in the medium term. The MPC therefore saw the need to monitor inflation developments closely and is ready to react to any second-round effects. The committee concluded that the current expansionary monetary policy is still appropriate and therefore decided to keep the central bank rate (CBR) at 7.00 percent.
The MPC will closely monitor the effects of the political measures as well as the developments in the global and domestic economy and stands ready to take additional measures if necessary. The committee will meet again in November 2021 but remains ready to meet earlier if necessary.
Dr. Patrick Njoroge
C.BARBER, MINDIVIDUALLY P.OLICY C.OMITTEE
September 28, 2021
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Central Bank of Kenya published this content on September 28, 2021 and is solely responsible for the information contained therein. Distributed by public, unedited and unchanged, on September 28, 2021 13:51:08 UTC.