APRM • SECOND COUNTRY REVIEW REPORT OF THE REPUBLIC OF KENYA 2.3.3 Monetary Policy 51. The monetary policy is aimed mainly at achieving and maintaining the economy’s general price levels with the ultimate goal of achieving an inflation target of 5.0% per year. In the 20112014 period, inflation exhibited a drastic declining trend. The inflation rate fell from 14.5% in 2011 to 10% in 2012 and further declined steeply to 4.9% in 2013; and thereafter rose to 7.4% in 2014. The overall decreasing trend of inflation was attributable to prudent monetary policy stance of the Central Bank of Kenya. More importantly, increased food production, together with declining petroleum prices significantly kept inflation down. Inflationary pressures and volatility in exchange rate characterized the year 2015. Consequently, the Monetary Policy Committee (MPC) raised the Central Bank Rate (CBR) from 8.5% to 10.0% in June 2015, and further to 11.5% in July. However, there were mixed performance in interest rates during 2015 arising from the changes in the CBR. The 91-day Treasury bill rate dropped from 8.58% in December 2014 to 8.26% in June 2015 and thereafter rising to 9.81% by December. Commercial bank’s loan advances and lending interest rate rose to 17.45% in December 2015 from 15.99% in December 2014 (Economic Survey, 2016). 52. Notwithstanding prudent monetary policy stances of the Central Bank of Kenya, there have been deteriorations arising from rapid currency depreciation in 2015. Strong food production coupled with declining petroleum prices has been more successful at keeping inflation down than deliberate monetary policy intervention. Nevertheless, the CBK continues to use the Central Bank Rate (CBR) to keep in check inflation. Inflation was reduced from 18% in June 2012 to 8.5% in May 2013 and thereafter raised to 11.5% in May 2013 to contain rising fragility in the money market. These efforts have mitigated inflation and proved responses to internal and external shocks, which have led to relative stability of domestic prices of goods and services. 2.3.4 Exchange rate 53. The exchange rate remained stable until 2014, but became volatile in 2015, accompanied by large depreciation resulting in loss of about 10% of the value of the Kenyan Shilling in 2015. This depreciation has been mainly attributed to the global depreciation of the US dollar, which left most of currencies on downward spiral, consequently affecting all the East African Community (EAC) Common Market regional currencies. This exacerbated the challenge facing the EAC Monetary Union and further delayed prospects of convergence. 2.3.5 Credit 54. Credit to the private sector has declined relative to public sector borrowing. Domestic credit from the banking sector increased by 29.2% in June 2015, compared with 14.6% over the same period in June 2014. Over the same period, growth in credit to the private sector decreased to 20.5% from 25.8% in the previous year. | 68 |