Treasury has asked the Central Bank of Kenya to stabilise prices as a means to achieving President Uhuru Kenyatta’s Big Four agenda.
In a notice setting out the price stability target, National Treasury Cabinet Secretary Henry Rotich noted that price stability is a prerequisite for a stable macroeconomic outlook.
“It is, therefore, expected that the CBK will maintain inflation within the target range during the 2019/20 financial year,” said Rotich as he maintained the inflation target at between 2.5 per cent and 7.5 per cent.
Inflation is the increase in the overall prices of goods and services in an economy in a year.
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Treasury maintained the inflation target at five per cent with a flexible margin of 2.5 per cent on either side of the target in the event of adverse shocks. CBK, using its monetary policy tools, is supposed to ensure that the overall increase in prices does not surge past 7.5 per cent or sag below 2.5 per cent.
In the last 12 months to June, inflation has remained within this target.
However, in 2017 when there was a drought in the country, inflation surged past the upper-limit to 9.2 per cent. “The Central Bank is, therefore, expected to achieve this five per cent inflation target and will be accountable to the Government and general public for its attainment,” said Rotich in the notice.
The flexible margin of 2.5 per cent on either side, said Rotich, was supposed 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,” explained Rotich, adding that in case of a deviation on either side by more than 2.5 per cent, CBK should furnish it with a letter explaining the underlying the factors and the efforts being taken to address the problem.
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CBK should also indicate the time period within which it expects inflation to revert to the desired target. Inflation target will be revised in the Financial Year 2020/2021.
In June, inflation increased by 5.7 per cent compared to 5.49 per cent in May partly due to increase in prices of petrol and diesel, said the Kenya National Bureau Statistics (KNBS).