Did CBK 'print' money?
Ideally, when there is a tight monetary policy then inflation--which is the general rise in the price of basic commodities--should drop.
Kenya's scenario is a curious one.
(A monetary policy that lowers interest rates and stimulates borrowing is known as an expansionary monetary policy or loose monetary policy. Conversely, a monetary policy that raises interest rates and reduces borrowing in the economy is a contractionary monetary policy or tight monetary policy.)
In expansionary monetary policy the central bank causes the supply of money and loanable funds to increase, which lowers the interest rate, stimulating additional borrowing for investment and consumption, and shifting aggregate demand right. The result is a higher price level and, at least in the short run, higher real GDP. (b) In contractionary monetary policy, the central bank causes the supply of money and credit in the economy to decrease, which raises the interest rate, discouraging borrowing for investment and consumption, and shifting aggregate demand left. The result is a lower price level and, at least in the short run, lower real GDP.
So as explained above, KE's is a tight monetary policy.
Interest rates have gone up. Companies have shelved or put on hold expansion plans, investors have run to the safer investment options--mainly government bonds. Banks have stopped giving out loans especially to household and generally the economy is on self evaluation mode.
The shilling volatility---one of the key reasons behind the monetary policy committee's decision for a tight monetary policy---has stabilized at around 102 to the mighty (or not so mighty anymore) dollar.
These are expected trends when there is a tight monetary policy.
But one thing stands out like a thorn---inflation has refused to go down in fact it is rising.
So how does one explain this.
Many an economists have pointed to lack of a proper transmission mechanism of monetary policy committee's decision citing among other things what is commonly called as 'structural rigidity.'
The latest inflation figures from the Kenya National Bureau of Statistics show that inflation rose (again) to 7.32% in November from 6.72% in October. According to CBK inflation should be between 5%-7%.
So what could be happening?
Looking at inflation figures, one thing is clear--it is the food component that is driving the rally. Meaning Kenya's inflation responds more to what Mama Mboga does in response to abundance or absence of rainfall than what a few individuals seated in a boardroom say.
Kenya inflation trusts the rain god than the MPC. It also means that there is need to innovate in as far as food supply and production is concerned because clearly there is some inelasticity/rigidity to change in prices.
But then there is another possible explanation: that the CBK 'printed' money in the not so distant past hence a rise in inflation despite a tight monetary stance.
MA
Kenya's scenario is a curious one.
(A monetary policy that lowers interest rates and stimulates borrowing is known as an expansionary monetary policy or loose monetary policy. Conversely, a monetary policy that raises interest rates and reduces borrowing in the economy is a contractionary monetary policy or tight monetary policy.)
In expansionary monetary policy the central bank causes the supply of money and loanable funds to increase, which lowers the interest rate, stimulating additional borrowing for investment and consumption, and shifting aggregate demand right. The result is a higher price level and, at least in the short run, higher real GDP. (b) In contractionary monetary policy, the central bank causes the supply of money and credit in the economy to decrease, which raises the interest rate, discouraging borrowing for investment and consumption, and shifting aggregate demand left. The result is a lower price level and, at least in the short run, lower real GDP.
So as explained above, KE's is a tight monetary policy.
Interest rates have gone up. Companies have shelved or put on hold expansion plans, investors have run to the safer investment options--mainly government bonds. Banks have stopped giving out loans especially to household and generally the economy is on self evaluation mode.
The shilling volatility---one of the key reasons behind the monetary policy committee's decision for a tight monetary policy---has stabilized at around 102 to the mighty (or not so mighty anymore) dollar.
These are expected trends when there is a tight monetary policy.
But one thing stands out like a thorn---inflation has refused to go down in fact it is rising.
So how does one explain this.
Many an economists have pointed to lack of a proper transmission mechanism of monetary policy committee's decision citing among other things what is commonly called as 'structural rigidity.'
The latest inflation figures from the Kenya National Bureau of Statistics show that inflation rose (again) to 7.32% in November from 6.72% in October. According to CBK inflation should be between 5%-7%.
So what could be happening?
Looking at inflation figures, one thing is clear--it is the food component that is driving the rally. Meaning Kenya's inflation responds more to what Mama Mboga does in response to abundance or absence of rainfall than what a few individuals seated in a boardroom say.
Kenya inflation trusts the rain god than the MPC. It also means that there is need to innovate in as far as food supply and production is concerned because clearly there is some inelasticity/rigidity to change in prices.
But then there is another possible explanation: that the CBK 'printed' money in the not so distant past hence a rise in inflation despite a tight monetary stance.
MA
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