Excerpt from the statement by the Central Bank of Kenya:
Although overall month-on-month inflation rose from 6.02 percent in July 2013 to 6.67 percent in August 2013, it remained within the target band set by the Government. The increase in overall inflation was largely an outcome of a base effect following notable price declines in 2012, coupled with increases in fuel and some food prices. Nevertheless, non-food-non-fuel inflation, which measures the impact of monetary policy, declined from 4.04 percent to 3.86 percent during the period, reflecting reduced demand pressure in the economy. Similarly, the 3-month annualized overall and non-food-non-fuel inflation rates remained stable. These developments, coupled with non-inflationary private sector credit growth continued to support a stable short-term outlook for inflation.
The exchange rate remained stable during the period, supported by effective liquidity management and resilient foreign exchange inflows from the Diaspora. The Committee noted that the ongoing initiatives by the Government to attract foreign investors and expand its trade markets would support exchange rate stability through increased foreign exchange earnings in the future.
The Government domestic borrowing programme was within target and was therefore not driving or exerting pressure on interest rates.
The Committee noted that confidence in the economy has been maintained. Activity at the Nairobi Securities Exchange (NSE) remains strong while foreign investor participation increased in August 2013. In addition, the MPC Market Perceptions Survey conducted in August 2013 showed that the private sector expects inflation and the exchange rate to remain stable. The Survey also showed optimism for strong economic growth in 2013 largely on account of macroeconomic stability and expected inflows of foreign direct investments.
However, the Committee noted that there remain risks to the macroeconomic outlook emanating from the global economy. Economic activity in the Eurozone remains weak while the instability in the Middle East and North Africa (MENA) could escalate. Following the instability in the MENA region, international oil prices rose between June and August 2013 which contributed to the increase in domestic fuel prices. In addition, foreign exchange inflows from tea exports to the region, which account for about a third of Kenya's tea exports, could be affected. These developments coupled with the high current account deficit remain a threat to macroeconomic stability. Furthermore, implementation of the new VAT measures from this month will contribute to short-term increases in inflation, but the effects will be mild.