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CBK to strengthen its monetary policy tools



The Central Bank of Kenya(CBK) intends to modernize its monetary policy tools and operations in line with new economic and financial realities.

According to a white paper that it has published, the monetary authority intends to refine its macroeconomic modelling and forecasting frameworks, improve the functioning of the interbank market and improve public understanding of monetary policy decisions.

These reforms will support better anchoring of inflation expectations and complement the positive gains made so far.

With the repeal of interest rates caps and foreign exchange controls, the CBK has sharpened its monetary policy tools to ensure price stability.

Financial experts maintain that while the CBK has been adjusting the policy rate, banks have been slow to respond, making this tool largely ineffective in determining the cost of credit.

While adopting new technologies in the financial sector, a transformation of the payments system, a structural shift in economic conditions and the need to better anchor inflation expectations have been beneficial to the financial industry; they have weakened the efficacy of the monetary policy framework.

CBK says its monetary policy tools have been weakened

The CBK has thus strengthened the policy formulation tools, upgrading the implementation infrastructure, ensuring effective communication, improving policy transmission and enhancing financial system stability.

Some of the critical steps include strengthening forecasting frameworks and institutionalising market perception surveys to assess better inflation expectations, issuing the Kenya Banking Sector Charter to improve transparency, and promoting an ethical culture in the banking sector.

The CBK has also introduced a cost of credit website that provides information on fees and charges relating to loan products to enhance full disclosure to customers.

It has also upgraded the Central Securities Depository(CSD) to improve monetary operations and the functioning of the interbank market.

Despite these milestones achieved so far, the Monetary Policy Committee(MPC), the CBK’s top policy-making organ, assessed that further reforms are needed to increase the effectiveness of the monetary policy.

The MPC has reviewed Kenya’s unique experiences, the diverse experiences of a wide range of countries, the insights from the IMF’s Technical Assistance from and international best practice.

Analysis of these inputs formed the basis of identifying the areas that need further reforms.

These reforms mainly relate to the monetary policy decision process, monetary policy transmission and implementation, and communication.

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