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African Development Bank Policy Dialogue on Inflation in the East African Region

African Development Bank Policy Dialogue on Inflation in the East African Region. Highlights on Kenya’s Experience by Prof. Njuguna Ndung’u, CBS Governor, Central Bank of Kenya February 14, 2012.

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African Development Bank Policy Dialogue on Inflation in the East African Region

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  1. African Development Bank Policy Dialogue on Inflation in the East African Region Highlights on Kenya’s Experience by Prof. Njuguna Ndung’u, CBS Governor, Central Bank of Kenya February 14, 2012

  2. 1. Inflation has mainly been driven by Food and Fuel Price Increases that account for 68 percent in the CPI Basket • Overall inflation has been declining since December 2011 reflecting the impact of the tight monetary policy stance and falling food and fuel prices supported by the appreciation in the exchange rate. • We need strong institutions to protect the supply side of the market; this drove monetary policy decisions to fail during the shocks period

  3. 2. The Exchange Rate Responded to Currency Wars Currency Wars Sudden steep strengthening of the US Dollar globally Kenya Shilling depreciation Depreciation in the exchange rate between April and October 2011 was exacerbated by the currency wars. The sudden steep weakening of the Shilling in September to 11th October 2011 is consistent with the sudden strengthening of the US Dollar in the global financial markets. Euro collapsing in the face of Greek debt default. The US Dollar has now become a safe haven in the global market. This is being felt by the global economy where there is a worldwide increase in demand for US Dollars. All countries in the region show the same effect and trends during this period

  4. 3. Developments in the Euro Zone Affecting Exchange Rates in the Region International developments have affected exchange rates in the region. The collapse of commodity prices has not spared the South African Rand either. Other currencies have depreciated: Rand 34%, Uganda Shilling 34%, Kenya Shilling 19%, Tanzania Shilling 13% (Tanzania has capital controls in its balance of payments)

  5. 4. Exports Financing Less of Imports: Exchange Rate has to Weaken • The proportion of imports paid for by export earnings declined at a faster rate in 2011: hence, this, besides exerting pressure on the exchange rate, has threatened foreign exchange reserves and diverted capital. The value of imports and exports stood at USD1,453.9 million and USD760.8 million, respectively, in November, 2011 giving a deficit of USD693.0 million in that month alone. • The fuel import bill rose from an average of 21.6 percent of the total cost of imports in 2010 to peak at 31.1 percent in August 2011. It has remained high thereafter. • This is a structural problem in the economy: a long term policy to support the export sector would boost foreign exchange inflows and reverse this trend.

  6. 5. Velocity of Money in Kenya has been Declining, An Indication of Financial Depth Velocity movements may imply unstable money demand

  7. 6. The Money Multiplier has been Rising, An Indication of Financial Innovation • The relationship between reserve money and broad money is unstable and unpredictable. • Declining velocity and unstable money multiplier: money demand unstable: implications for monetary policy instruments • Monetary policy framework; Target broad money via reserve money as an intermediate target – is inadequate

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