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.
The annual inflation rate measured by the Consumer Price Index (CPI) rose to 5.29 per cent in 2020 from the respective 4.70 and 5.20 percentages realized in 2018 and 2019. The rise in inflation was mainly attributable to rising food prices and beverages costs brought about by the constrained domestic supply as a result of less favorable weather conditions experienced in the first half of 2019. Even so, weather conditions progressively improved over the remaining part of the year leading to a decline in food prices and the overall inflation. Generally, prudent macroeconomic policies alongside relatively stable Kenya Shilling against the major currencies particularly the US Dollar has contributed significantly towards maintaining stable inflation rates.
Kenya has remained stable in its interest rates at an average annual rate of 13%. This has ensured the affordability of the credit by the borrowers leading to overall economic development.