Uhuru instructs CBK to keep close watch on inflation

By John Oyuke

Treasury has instructed the Central Bank of Kenya (CBK) to ensure inflation is at five per cent to support the Government's economic policy, including its objectives for growth and development.

Finance Minister Uhuru Kenyatta said if the inflation rate is up or down the target by more than two percentage points, the bank owes him an explanation.

"The bank shall strive to achieve this inflation target at all times and it is the target for which it is accountable to the public," Uhuru said in a notice to the CBK Governor on the price stability target of the Government.

He said CBK Governor should explain the policy action the bank intends to take and the period within which the bank expects inflation to return to the target.

"Central Bank should explain how the intended action meets the Government’s monetary policy objectives."

The notice, dated August 3, says if inflation remains more than two percentage points above or below target for three consecutive months after the first letter, the Governor must explain to the minister.

"The operational target for monetary policy shall be inflation rate of five per cent as measured by the 12-month increase in Consumer Price Index published by the Kenya National Bureau of Statistics," Uhuru said.

Price stability target

The notice is issued under section 4 of the CBK Act, which requires the minister to specify in every 12 months, the price stability target and economic policies to be taken by the Government.

The law also requires the minister responsible for finance to publish the notice in a manner he deems fit and lay a copy of the same before the appropriate committee of the National Assembly.

Though still within the target, the country’s year-on-year inflation rate increased marginally to 3.6 per cent in July from 3.5 percent in June.

The CBK’s Monetary Policy Committee said early this month that the July price data from Kenya National Bureau of Statistics showed inflation to be 3.6 per cent relative to 3.5 per cent and 3.9 per cent in June and May.

CBK Governor Njuguna Ndung’u, who spoke during a press conference on the deliberations of the MPC, said evidence from recent surveys shows that inflation would be stable.

He said market surveys conducted in May showed 18 per cent of private sector respondents said inflation would remain unchanged and 37 per cent thought it could decline.

By July, some 28 per cent of private sector firms expected inflation to remain unchanged while 44 per cent thought it could decline.

Under the Vision 2030 blueprint, the Government has committed to pursue prudent and stable macroeconomic policies as a basis of achieving strong economic growth and employment creation.

External events

This commitment to macroeconomic stability, however, recognises that at times the economy might suffer from adverse external events (like the recent global financial crisis and oil price increases) or domestic challenges (drought and floods).

Uhuru observed that such disturbances might result in actual inflation deviating from target and thus attempts to keep it at target level might produce unwarranted variability in output.

The Vision 2030’s Medium Term Plan targets real Gross Domestic Product (GDP) growth to rise steadily to 10 per cent by 2012/13 as a result of various interventions, including implementation of flagship projects under the economic and social pillars.

Treasury believes that sustaining the steady rise in growth rates would provide a strong basis for achieving the Millennium Development Goals as well as laying the groundwork for achieving an equitable society.