I get the impression that CBK is not doing enough to curb inflation.

What has happened in the last 3-4 months?


- oil prices have been rising - transport costs have been pushed up

- drought is on the way - means production will be less and we have more money chasing few goods

- the Kenya shilling depreciated from Sh 80 in Dec to 86 now to a dollar - prices of all imported goods have increased.

What should CBK do?

- Start mopping the cash in circulation - by increasing interest rates.
- Controls through other money supply methods / e.g control of bank deposits that can be borrowed.


The most effective way of controlling inflation is usually by Interest Rates.

-This will help in the following ways (upsides).

1) Stablise the Kenya shilling - as interest rates go up - foreign investors brign in more forex to earn higher interest than in their countries. This results in higher supply of dollars and strengthening of the shilling.
2) Reduce inflation - when we have less cash chasing more products deflation usually occurs

However there are disadvantages about raising interest rates - Downsides

1)Economic growth will be reduced. High interest rates mean less borrowing and therefore less economic activity. Banks invest their deposits in treasury bonds & bills instead of lending to private business for economic growth. But the government can still drive economic activities through other ways - e.g. the construction of infrastructure using tax funds.

2) NSE - when interest rates go up the investors / fund managers choose to put their money in bonds & treasury bills instead of NSE. The result is that NSE share prices fall and some people lose

In my opinion the CBK should tackle inflation and ensure prices stablise.

Do you agree? If not what else should the CBK do?

@SAC Cohen,
Thanks for your comment. What should be done to control inflation...I guess everyone is feeling it.

I reckon a slight adjustment of short interest rates (1-3months) upward to reflect and address short-term nature of inflation.

This will have the double effect of increasing cost of funding a speculative dollar position (reason for KES depn)and mopping up short term liquidity.

Importer inflation (caused a weaker shilling) would thus also be addressed

I would connsider sterlization using subsidies...but the arguement would become academic...

Should

very good points liv, remember its all cause and effect...the blame falls squarely on CBKs doorstep on this one, i have argued severally that they devalued the KES by errors of comission, and omission, comission-fx reserves purchases of +500mio omission-failure to sterilize the resultant KES sold, please note that the object of the CBK is price stability and to defend the value of the KES period! they have failed on this front by trying to foster growth by printing money...CBK shud mop up the excess liquidity they created last year otherwise growth will be fleeting