Financial Sector

Monetary policy has been largely accommodative. Year-on-year inflation has remained within the Government target of 5.5 percent. Inflation stood at 5.7 percent, slightly down from 5.8 percent in January 2020. The low inflation is mainly driven by a reduction in food prices and subdued demand caused by the pandemic. Therefore, lower aggregate demand and lower cost of production (PPI) caused by pandemic instigated lower demand for inputs explain the recent decline in headline inflation. Headline as at end February 2021 was 5.4 percent. In addition to the interactions between aggregate demand and supply, movement of headline inflation within the target band could be attributed to prudent monetary policy. It in turn gave the monetary authorities the latitude to pursue accommodative monetary policies. The policy rate was loosened from 11.5 percent in 2015 to 8.5 percent in 2019. The Kenyan Shilling (KES) was stable against major currencies.