Saturday, 18 February 2012

Monetary policy and inflation
To compete in the kenyan economic markets, you need to understand what price stability, inflation (and deflation) are, and how monetary policy acts to control inflation in the kenyan economy.
The Central Bank uses monetary policy in order to maintain price stability. Price stability occurs when goods and services, in general, aren't getting rapidly more expensive (that's inflation) or less expensive (that's deflation). At present price stability is defined as keeping inflation "on average over the medium term" between one and three percent in an agreement set out between
the Minister of Finance and the Central Bank Governor.
The Central Bank adjusts the Official lending Rate in order to influence prices in the economy, and ensure price stability is maintained

(this is the houses the most powerful issues
 dealing with
 economic matters in kenya,it hosts the office of
 governor and several others)
The role of money
A long time ago, people traded by barter. When people barter they directly exchange goods and services for other goods and services. Money was invented because it solved many of the severe limitations of bartering. With money a person can buy from and sell to different people much more easily. Money also allows production and consumption to more easily happen at different times. It gives people the ability to save money and spend it later.

However, for money to work well it must be a reliable standard of value – just as a metre is a universal standard of length and a kilogram is a universal standard of weight. To perform that role, money needs to be an effective store of value. To be willing to exchange goods and services for money, you need to have confidence that the money will be of roughly the same value at a later date when you want to spend it.
What causes price stability, inflation and deflation?
The rate of inflation tends to increase when the overall demand for goods and services exceeds the economy's capacity to sustainably supply goods and services. Likewise, when productive capacity is greater than demand, the rate of inflation tends to decrease, and, if the excess capacity persists, deflation can occur.

By "demand" we mean the desire for goods and services that is supported by the means to purchase those goods and services.

By "the economy's capacity to sustainably supply those goods and services" we mean the level of production that can be sustained without shortages occurring.

Thus, throughout the economy, if factories are working flat out to meet demand, inflationary pressure may emerge. Factory staff will work longer hours, which may require overtime payments, thereby forcing firms to put up their prices hence cost-push inflation.

Conversely, if factories are producing more goods than they can sell, then to get rid of the stock that is building up they may have to reduce their prices. If enough do this the rate of inflation will start to fall

( be continued in the next blogging!)
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