Njuguna Ndung'u: Taming of inflation and food security
Opening remarks by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya and
Chairman of the Monetary Policy Committee, during the Monetary Policy Committee Seminar
on "Taming inflation and food security", The Kenya School of Monetary Studies, Nairobi, 14
August 2009.
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Permanent Secretaries: Ministry of Finance; Ministry of Planning, National Development and
Vision 2030; Ministry of Agriculture; Ministry of Trade; Ministry of Special Programmes;
Representatives of our Development Partners;
Chairmen and Heads of Government Parastatals;
Representatives of the Private Sector;
Distinguished Guests;
Ladies and Gentlemen;
It gives me great pleasure to be with you today during this important seminar on "Taming
Inflation and Food Security". Let me take this opportunity from the onset to warmly
welcome you all to the Kenya School of Monetary Studies (KSMS).
As you may all be aware, the Bank's principal objective is to formulate and implement
monetary policy directed at achieving and maintaining stability in the general level of prices,
as well as supporting the economic policy of the Government including its objectives of
growth and employment. Price stability is an important signal to the economy and provides a
stable planning horizon to predict future prices and perhaps returns. Most coordination
failures occur due to the inability to forecast future prices or calculate, for example, return on
investment.
This seminar comes at a time when the country is just recovering from the effects of high
inflation arising from supply side factors caused by several shocks. These shocks have an
international as well as domestic dimension. They include volatile oil prices, commodity
prices and drought conditions which continue to pose a challenge to the achievement of the
Bank's core mandate of price stability.
Given these outcomes - that shocks tend to affect domestic prices upwards and domestic
output downwards, simultaneously - we have to rethink the appropriate measure of inflation
and how to target or contain it.
But also, appropriately computing and reporting inflation becomes very critical - the
information processed from the reported numbers on inflation leads directly to cost of living
adjustment (COLA) requests even at CBK!
Usually, the CBK must have some inflation target. But also this has to be consistent with
inflation experience or profile for the general public as well as create the required
consistency of the monetary framework and economic growth profile.
This workshop should help in defining the appropriate inflation indicator.
The emphasis that seems to converge is to come up with a single measure of inflation that
can be easily explained, analyzed and related to economic outcomes. But of course different
economic constituencies will understand this in terms of how it affects them.
Alternatively we may want to focus on measures that will say exactly what they mean. These
include:
a) Food inflation.
b) "Core" inflation - (define what is core).
c) Inflation (takes care of all the above) - National inflation indicator.
d) For CBK, we would prefer a non-tradable goods price index to compute our inflation
index that responds or is affected by monetary policy directly and also links to the
exchange rate and the issues of competitiveness. For your information, Ladies and
Gentleman, many countries are currently publishing statistics on tradable and
nontradable inflation as part of their dissemination of inflation data. This allows central
banks to easily compute the profile of real exchange rate.
e) Finally, we want an inflation index that comes close to measuring or reflecting the
cost of living. The question is, how can this be done and at least cost by KNBS and
how other players in this process can partner.
But why do we want several indicators of inflation to be developed? At the outset, money or
the demand side is just one factor or driving force on inflation. The other one is on the supply
side. Monetary policy becomes passive when supply side factors drive the domestic prices
and so inflation. This means that several indicators can also bring in a wealth of information
to be processed.
the achievement of the inflation target has been constrained by increased
The experience;
volatility in food prices and other exogenous shocks. In particular, the overall
month-onmonth inflation increased from 9.67 percent in January 2007 to 11.1 percent in June 2007,
and to 31.5 percent in May 2008 before declining gradually to 17.79 percent in July 2009. On
the other hand, CBK underlying inflation declined from 5.15 percent in January 2007 to 4.90
percent in June 2007 before rising to 7.90 percent in July 2009. The issues and questions
raised by such volatility in one measure of inflation thus attract policy debate and action.
It is important to note that the rising overall inflation rate during the period was attributed
mainly to food prices which account for 50.5 percent of the overall consumer price index
basket. The rising food prices have been attributed mainly to drought, supply constraints and
lack of cultivation by farmers in Kenya's grain basket in the Rift Valley who were displaced
following the post poll crisis in January 2008.
Food inflation has been quite volatile and erratic since January 2007, increasing from 11.8
percent to 15.9 percent in December 2007, 44.2 percent in May 2008 and declining to 24.4
percent in July 2009. The volatility of food inflation was the highest during the period and
using a measure of volatility stood at 10.72 percent compared with 8.98 percent and 6.19
percent for fuel and transport & communication inflation rates, respectively.
The Monetary Policy Committee of the Bank is concerned that the prevailing famine and
drought in the country will result in a spike in inflation and so an appropriate policy response
is required.
most studies have advocated for improved agricultural productivity as the
The solution;
most effective way of addressing food crises associated with higher international prices and
food security concerns. But this has to be supported by an appropriate infrastructure for
processing, storage and transportation of food.
In this regard, it is our hope that this seminar will seek to achieve the following objectives:
a) Agree on how best to report inflation.
b) Review the sources, magnitude and structure of inflation in Kenya, to gain a
better understanding of its dynamics.
c) Come up with feasible solutions to the food supply problem.
d) Deliberate on possible action plans among key stakeholders to keep inflation
low and stable.
This seminar is therefore expected to come up with resolutions that would form a basis for a
long term policy on domestic prices and food security in Kenya. We still have to contend
ourselves with a three-dimensional solution: food production; food processing; food storage
and transportation.
Let me underscore the important role of partnership between the stakeholder-institutions
represented here today in addressing the challenges of inflation. It is my hope that such
partnerships will involve regular consultations, sharing information and strategies geared
towards seeking solutions to supply constraints or challenges to food production and
distribution with the overall objective of achieving price stability. This workshop should
redefine and strengthen future partnership and the responsibility for each institution.
On behalf of the Central Bank of Kenya and the Monetary Policy Committee, let me express
my sincere gratitude to the presenters, discussants and all participants who responded to our
invitation and have graced us with their presence at this seminar. I am sure they will provide
a good platform to share information and discuss feasible solutions.
Ladies and Gentlemen, I now take this opportunity to declare this seminar officially open.
I wish you all fruitful deliberations.
Thank you.