1. BACKGROUND TO THE MPC DECISION IN THE MEETING OF 27TH JULY 2011
Presentation to the Media by
Prof. Njuguna Ndung’u, CBS
Chairman, Monetary Policy Committee
August 1, 2011

2. Outline Key Messages from the MPC Meeting Economic Growth
Developments in Inflation
Exchange Rate Direction: Inhibiting Expectations
Monetary Policy Successes for the Period
Managing Expectations: Role of Stakeholders

3. 1. Key Messages from MPC Meeting
The MPC has been implementing a tight monetary policy stance since March to rein in inflation, dampen inflationary expectations and stabilise the exchange rate.
To facilitate commercial bank liquidity management and lessen recourse to the Discount window, they are now required to maintain Cash Reserve Ratio (CRR) based on a weekly average instead of the current daily average.
The tight monetary policy stance will not achieve the desired results if the supply side of food, fuel and energy are not signalling relief. They would merely fuel inflationary expectations.
Monetary policy has been successful in constraining the growth of broad money supply below its non-inflationary target. Private sector credit is growing, and mainly financing activities in the productive sectors – this therefore rules out demand pull inflation.
A wide range of economic indicators analysed as well as the results of the July Market Perception Survey revealed strong economic growth and sustained confidence in the economy.
In its meeting of 27th July, 2011, the MPC retained the CBR at 6.25 percent, but will continue to monitor the situation. Monetary policy was observed to be tight enough .

4. 2. Economic Growth: Sustained Economic Activity Despite Shocks on the Economy
Imports by Category (USD Million)
12-month cumulative power and cement consumption
Strong economic growth supported by imports of capital and intermediate goods. This is depicted by increased power and cement consumption.

5. 2. Economic Growth: Sustained Economic Activity Despite Shocks on the Economy …
Quarter growth in Real GDP and Credit to Private Sector
12-Month GDP growth (%)
Strong economic growth has also been supported by credit expansion to the productive sectors of the economy. Sustained strong growth performance is necessary to ease inflationary pressure.

6. 3. Developments in Inflation: Non-Food, Non-Fuel Inflation within Target
Food and Fuel inflation that was declining in the first six months of 2010 increased
in a similar period in 2011 significantly driving the rise in overall inflation.
In addition, there have been minimal inflationary pressures on the food and fuel items.

7. 3. Developments in Inflation: Supply Side Factors Driving Inflation …
12-month Money supply and credit growth, and overall inflation (%)
Quarterly sectoral credit expansion (Ksh Billion)
2010
2011 Q1 Q2 Q3 Q4
Agriculture
-1.1
2.4
1.9
1.2
2.0
5.6
Manufacturing
4.7
6.2
10.9
2.6
4.9
11.8
Trade
-12.2
7.5
9.5
13.7
12.0
Building & construction
-9.9
-4.8
0.6
0.9
3.6
3.3
Transport & communication
-6.4
0.1
3.7
11.6
Finance and insurance
4.3
-4.4
-2.4
1.5
Real estate
27.9
11.3
5.9
6.1
13.0
Mining & quarrying
5.8
2.3
-0.2
-1.5
7.8
3.1
Private households
24.6
2.8
-0.9
6.5
15.3
Consumer durables
3.2
-4.2
2.1
5.4
6.0
1.7
Business services
4.2
8.8
8.6
2.2
Other activities
-5.5
-5.2
8.7
5.2
17.8
Total
21.1
39.9
43.7
45.5
66.0
88.5
Growth in broad money supply (M3) has been slowing down while private sector credit
expansion has been more towards financing economic activities in the productive sectors.
These effects therefore ruled out demand pull inflation.

8. 4. Exchange Rate Direction: Inhibiting Expectations
International events continue to shift the relative strengths and weaknesses of Kenya’s major trading currencies.
Swiss Franc, Japanese Yen and Canadian Dollar have been main gainers with international currency portfolio shifts.

9. 5. Monetary Policy Successes for the Period: Quantitative Targets Achieved
Broad Money growth still below target - an indication that the current inflationary pressure is emanating from the supply side.

10. 6. Managing Expectations – Role of the Media…
The media plays an important role in shaping inflationary expectations.
Some media reports have been exacerbating inflationary expectations.

11. 6. Managing Expectations – Role of the Media…

12. 6. Managing Expectations – Role of Other Stakeholders…
Upwards adjustments in fuel prices despite zero-rating of taxes and declining
world oil prices has also exacerbated inflationary expectations.

13. Growth in Private Sector Credit Lending Interest rates
6. Managing Expectations : Changes in Perceptions/Expectations (% of Banks)...
Growth in Private Sector Credit
Lending Interest rates
Decrease
Remain the same
Increase by 1-10%
Increase by 10—20%
Increase by above 20%
Decline by
More than 2 %
1-2 %
Remain
the same
Increase by
1-2%
Sep -2009 52 44
Nov-2009 33 50 17
Jan-2010 7 93 53 47
Mar-2010 15 45 40 5
May-2010 30 25 4 76 20
July-2010 14 75
Sep-2010 3 56 32 6 59 26 9
Nov-2010 24 46 58
Jan-2011 8 27 34 31 39 29
Mar-2011 28 12 60
May-2011 18 49
July-2011 21
Banks expect to raise interest rates and slowdown lending to the private sector as a consequence of tight liquidity in the market.