Kenya Inflation Expected to Remain Within Target Range in 2018, Experts Say

Kenya’s inflation has edged up to 4.35 percent in July from 4.3 percent in June compared to 4.0 percent in May 2018, mainly reflecting increases in energy prices.

The latest data from the Kenya National Bureau of Statistics (KNBS), the rise was as a result of a rise in the housing, water, electricity, gas and other fuels’ index which increased by 0.12 percent in July compared to 0.52 percent in June.

Food and non-alcoholic beverage index retreated 2.40 percent y/y, buoyed by the improved weather conditions.

Besides the Central Bank of Kenya being optimistic that the “Overall inflation is expected to remain within the target range -2.5-7.5 percent – mainly due to expectations of lower food prices reflecting favorable weather conditions.” 

It is wary that: “Higher domestic fuel prices due to the recent increase in international oil prices and the impact of the excise tax indexation on prices of some of the CPI items are expected to exert moderate upward pressure on inflation in the near term.”
Economists see risks that could stem from recent tax proposals that could affect the Consumer Price index (CPI). 

“The approval of the Finance and associated bills could see some pressure on commodities. To be sure, if approved, inflation adjustment to excise duty as well as the reintroduction of the 16 percent VAT on fuel from September 2018 will have considerable upside risks to commodity prices,” notes CBA Group Financial Analysts. 

Similar sentiments are shared by Cytonn Investments however, they “Expect Inflation to average 7.0 percent in 2018 down from 8.0 percent in 2017 and within the government target range. Thus no need to implement restrictive monetary policy as there are no expectations of high inflationary pressure.” 

CBA Analysts are opinionated that a stable inflation could support further interest rate reduction. “This should provide more wiggle room for further monetary accommodation.”

For the second time this year, the Monetary Policy Committee (MPC) cut the Central Bank Rate by 50bps to 9.0 percent as focus shifts towards plugging the country’s output gap.

“While economic performance has improved, overall productivity remains below potential, partly due to the lassitude in credit markets,” according to CBA.

“In transmitting the signal, we anticipate that the Central Bank, in coordination with Treasury, will seek to replicate the signal across the yield curve. Sustaining higher returns on government securities may continue to disincentivize banks from lending to the private sector. This will require better fiscal discipline in regards to local borrowing,” they add.

Cytonn on the other hand note “Reducing the CBR on the other hand would further limit credit access to the private sector, which remains a key concern despite improving to 2.8 percent in April from 2.0 percent  in March as its still below the 5-year average of 14.0 percent as well as the government set annual target of 12.0 percent – 15.0 percent, since it would effectively lower lending rates, thus making credit pricing to private sector harder.”

Overall, economists have forecast the country’s annual average inflation rate to remain with the government’s target range.