that will help to lower headline inflation. at the last informal uba dinner i said that, provided that the outlook for inflation did not deteriorate, the bou hoped to further lower the policy interest rate gradually during the course of 2017. page 7 of 9 accordingly we reduced the central bank rate by 50 basis points at our monetary policy committee meeting last month. given the relatively benign outlook for core inflation, i believe that we should have scope to implement further modest reductions in the cbr in the near term, although again i want to stress the caveat that any further reductions are contingent on there being no worsening of the core inflation forecast. finally, i would like to re - emphasise my desire to see the reductions that we are effecting to the policy interest rate being passed through to bank borrowers. the data on shilling lending rates for march indicate that the average lending rate was still 22. 5 percent, which means that the average lending rate had fallen by less than 3 percentage points from its most recent peak in february of last year. page 8 of 9 i hope that we will be able to achieve more substantial reductions in bank lending rates in the next few months. thank you for listening. page 9 of 9

course, page 4 of 9 some individual industries may not have sufficient demand to sell all of their output – that will always be the case in any economy but at the aggregate level there is little evidence to indicate that a lack of demand has depressed real economic growth. if that were the case, we would expect to see that the sectors most badly affected would be the non - traded goods sectors of the economy, because these sectors are dependent fully on domestic demand. in fact the very opposite is the case. the services sector, which consists predominantly of nontraded goods industries, did much better than both industry and agriculture in the first half of the fiscal year, while our composite indicator of economic activity indicates that services also grew faster than the other sectors in the third quarter. that suggests that a shortage of aggregate demand is not the cause of the slowdown in growth in 2016 / 17. page 5 of 9 a sustained deficiency of aggregate demand would also lead to disinflation ( i. e. falling inflation ). but there is no evidence of this occurring. core inflation has been quite stable, at around 5 percent, for the last 9 months, which suggests that the level of aggregate demand is about right, given the economy ’ s capacity to supply goods and services, which as i noted earlier, has been temporarily depressed by the supply side shock to agriculture. on the subject of inflation, our forecasts indicate that core inflation should be in line with our 5 percent policy target in 12 months ’ time, which is the time horizon for our monetary policy decisions. our 12 month forecast for inflation has remained largely unchanged since the end of last year. however, some of the upside risks to core inflation, which we had identified six months ago, notably the rising food and fuel prices, and the risk of further exchange rate depreciation, have abated somewhat. page 6 of 9 food crop prices have risen steeply – annual food crop inflation was nearly 22 percent in april – but the pass - through to core inflation has been muted. the exchange rate has also been relatively stable in the first half of 2017. the nominal effective exchange rate, which takes into account exchange rate movements of the shilling against all our trading partners, has only depreciated by 1. 6 percent since the end of 2016. we also expect that the current food price shock should have started to ease by the third quarter of this calendar year, as the better weather that we are now experiencing boosts harvests, and