The economic complexities presented by the COVID-19 pandemic is pushing monetary authorities towards more flexible long term policy objectives.
To this end, the US Federal Reserve last week reviewed its long term inflation management strategy away from an absolute to an average target of 2.00%.
This will allow inflation to somewhat run above 2.0%, without raising expectations of higher interest rates.
The shift may affirm the current broad-based low policy rate environment across the globe given the engrained leader-follower relationship among central bankers.
Moreover, the Fed’s policy move may offer some reprieve to central banks in emerging and developing markets, whose policy decisions are in part influenced by the impact of interest rate differentials on their local currencies.
Locally, the central bank’ of Kenya’s approach to inflation targeting has provided the much-needed flexibility in its responses to economic shocks.
Currently, with inflation well anchored within the target band of 2.5-7.5%, the central bank has space to pursue a more growth-oriented policy stance.
In August 2020, headline inflation held at 4.36% with muted pressure across the various items in the inflation basket.
For now, risks to the inflation outlook remain limited thanks to weak demand and somewhat tame food price pressures. Even then, the CBK may be reluctant to dive into further monetary easing.
The reluctance to ease further may be supported by the success of non-interest rate policy strategies including prudential easing that has allowed for the restructuring of loans as well as the fiscal responses to the crisis, especially through tax relief.
The central bank rate (CBR) is therefore likely to be maintained at the 7.00% level, ceteris paribus, at least till the end of 2020.
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