Discussions on stimulating the economy and taming inflation within the government target of between 5 and 7 per cent in the medium term are likely to dominate the first meeting of the Central Bank's rate setting committee this month. The Monetary Policy Committee (MPC) of the Central Bank , which will hold its first meeting this year on January 14 , are likely to look keenly at interventions that may stimulate growth in the economy following a slowdown in the third quarter of 2013, according to analysts. "The economy slowed down, year-on-year, in the third quarter of 2013. They could look at ways of stimulating growth within the economy," said a market analyst at Contrarian Investing Mika Davis. The economy slowed down in the third quarter of 2013 compared with a similar period in 2012 due to poor performance in agriculture, and the hotels and restaurants industries. The economy, which shrank to 4.4 per cent in the period compared with a growth of 4.5 per cent in 2013, needs to be stimulated, especially on the interest rate front, by way of effecting a further rate cut. INFLATION RISK But most of the analysts Smart Company spoke to ruled out a possibility of a rate cut. Mr Eric Munywoki , a research analyst at Old Mutual , said the MPC will be looking at the inflation risk, the exchange rate level and the interest charges at their rate setting meeting this month. Most of these macro-economic factors have been relatively stable in the past few months, which raises the possibility of a rate hold. Currently, inflation is at 7.15 per cent although the government wants to maintain it at lower levels. "Chances are they are likely to retain the rate at this level," Mr Munywoki said on phone. In a recent policy report written to the International Monetary Fund (IMF), the government said it was committed to shifting its monetary policy stance to inflation targeting away from the money supply target. The implementation of the VAT Act 2013 that effected a 16 per cent levy on basic commodities in September 2013 led to a spike in food prices. However, the government's clampdown on opportunistic pricing led to costs of some basic commodities like milk being reduced. Analysts further said the expectation of favourable rainfall that began towards the end of last year is likely to keep inflation at between 7 per cent and 8 per cent in much of this year. They further argue the Central Bank is likely continue its open-market-operations to ensure relative stability in the foreign exchange market. At its bi-monthly meeting on November 5, 2013 , the MPC retained the policy rate at 8.5 per cent. The exchange rate has remained less volatile fluctuating between 84 – 86 levels against the US Dollar, a trend that is likely to be sustained this year.
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