Most people meet the Central Bank of Kenya twice: on the banknotes, and in a news bulletin about "the CBR". Both are real, and neither explains why its decisions show up in your rent, your loan and the rate your money market fund pays.

What it is for

The Bank was established in 1966. Its functions are set out in Article 231 of the Constitution and in the Central Bank of Kenya Act, and its primary mandate is to formulate monetary policy to achieve and maintain price stability — alongside promoting a sound financial system and an effective payment, clearing and settlement system.

Price stability is the one that matters to a saver. Stable prices are what let anyone — a household, a business, a foreign investor — make a decision that runs longer than a few months. An economy where nobody can guess what next year costs is an economy where nobody commits to anything, and that shows up as expensive credit long before it shows up as a headline.

Six core functions

Monetary policy. Economic and financial analysis across a wide range of indicators, which feeds the decision below.

Currency services. Issuing Kenyan currency and keeping it free of counterfeits, clean and fit for circulation.

Financial markets. Managing the supply of money, and running the issuance and repayment of Treasury bills and bonds on the government's behalf. This is the function that produces the auction results every return on Ipahco is read against.

Bank supervision. Licensing, regulating and supervising commercial banks, microfinance institutions, forex bureaus and the representative offices of foreign banks.

Banking services. Acting as banker to the national and county governments and to the commercial banks.

Payment systems. Licensing and monitoring the systems that move money between parties, and settling between banks through the Kenya Payments and Settlement System.

Note which licences are not here. Banks, microfinance and forex bureaus are the Central Bank's. Stockbrokers, fund managers and unit trusts belong to the Capital Markets Authority, and saccos to SASRA. Three different regulators, and knowing which one a firm answers to is the first question to ask of anybody holding your money.

The decision everyone reports

The Monetary Policy Committee meets to set the Central Bank Rate, the rate at which the Central Bank lends to commercial banks. Raise it and credit through the whole system gets dearer; lower it and lending is meant to get cheaper and more plentiful.

That is one of three tools, and the other two are less visible:

The reserve requirement. Commercial banks must hold a share of their deposits at the Central Bank. Raise that share and banks have less to lend out and less to pay interest on, which pulls money out of circulation. Lower it and the opposite.

Open market operations. The Bank buys and sells government securities to adjust how much money is in the market directly. To take money out it enters repurchase agreements, selling securities to commercial banks for a set period; to inject money it does the reverse.

All three answer the same question: is there too much money chasing the goods the economy can produce, or too little?

Why too little is also a problem

Inflation reads like something to be driven to zero. It is not. If prices fall — deflation, a general decrease in prices — companies cannot hold margins, investment stops looking worthwhile, and an economy that has stopped investing has stopped growing. The target is a balance, not a minimum.

Each year the Central Bank and the National Treasury design a monetary programme setting a target inflation rate and a target growth rate for the next twelve months. The medium-term target is 5%, with two and a half percentage points of tolerance either side — 2.5% to 7.5% — the band being there to absorb shocks nobody controls, like a drought or an oil price.

What it means for your money

Your loan. The CBR is what bank lending is priced off. A cut is meant to reach you; whether it does, and how fast, is a different question from whether it was made.

Your fund. A money market fund lends short-term to banks and to the government. When the Central Bank tightens and short rates rise, fund yields follow within weeks — which is why a fund's rate is a reading with a date on it, not a property of the fund.

Your bills and bonds. The auction results the Bank publishes are the risk-free rate. Every other return in the country has to beat it to be worth its risk, and Ipahco's comparison is built on that premise.

Your savings in real terms. The Bank's whole first mandate is to stop the money in your account quietly losing value. When it misses, nothing on your statement says so — which is why the inflation number is worth reading yourself rather than waiting to feel it.