Treasury retains inflation target at 5 percent for the ninth straight year


Treasury retains inflation target at 5 percent for the ninth straight year
File Photo of The National Treasury.

In Summary

  • The Central Bank of Kenya (CBK) will be mandated to achieve this target across the 2020/21 fiscal year to preserve macro-economic stability and reduce undesirable fluctuations in economic performance.
  • The retention of the 5 percent inflation rate for instance means a Ksh.1000 note will only lose its purchasing power by no more than Ksh.75 over the next 12-months.
  • Kenya’s inflation rate has largely abided by Treasury’s band of 2.5 to 7.5 percent in recent years while recent monthly trends have been indicative of disinflation.

The National Treasury has retained its inflation target at 5 percent with a 2.5 percent margin on either side for the ninth straight year.

The Central Bank of Kenya (CBK) will be mandated to achieve this target across the 2020/21 fiscal year to preserve macro-economic stability and reduce undesirable fluctuations in economic performance.

“The flexible margin of 2.5 percent on either side is to cater for effects of external shocks such as adverse effects of the COVID-19 pandemic and oil price variations. Domestically, shocks may emanate from rapid and severe changes in weather conditions,” noted Treasury Cabinet Secretary Ukur Yatani in his price stability notice to Parliament.

Inflation targeting by government allows for a desirable growth rate in consumer prices preventing both cost pressures while allowing for sensible GDP expansion.

The retention of the 5 percent inflation rate for instance means a Ksh.1000 note will only lose its purchasing power by no more than Ksh.75 over the next 12 months.

Disinflation

Kenya’s inflation rate has largely abided by Treasury’s band of 2.5 to 7.5 percent in recent years allowing government to implement policies under a stable macro environment.

The CBK on its part targets to maintain this rate through a number of initiatives which are mainly premised on containing money in supply including the sale and purchase of government securities.

In 2019, the rate of inflation closed the year at 5.82 percent having risen slightly from 5.71 percent in 2018.

Recent trends have however be indicative of disinflation-defined as a temporary slowing of the pace of price inflation.

Inflation in June for instance fell to 4.59 percent in June from a 7.17 percent high in February supported in large part by easing food costs which outweighed increases in transport and fuel costs in months following the entry of the Covid-19 pandemic.

The rate is expected to largely hold supported in part by the lowering of the effective tax rates on both VAT and income taxes to cushion Kenyans from effects of the pandemic.

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Story By Kepha Muiruri
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