Kenya Inflation: CBK Expected to Raise Interest Rates in Q3

The Central Bank of Kenya (CBK) has kept rates below 14 per cent and flattened the yield curve for 15-year and beyond tenors.

Central Bank of Kenya Kisumu Branch I Khusoko

So far this year, the bond market, consistent with the global market’s trend, has been largely bearish. In fact, benchmark rates including the two and ten-year papers have so far this year risen by 151bps and 83bps respectively.

The upward pressure reflects primarily, rising inflation expectations and to some degree, an aggressive domestic borrowing stance by the sovereign.

After rising to 6.5% in April of 2022, inflation expectations have firmed to the upside. We now expect headline inflation to rise above 7.5% in June and remain above the upper limit of the statutory target band through Q3, before easing in the last quarter.

However, the reversal in the trend is largely subject to the evolution of global supply chains as well as local weather conditions. Moreover, the expiry of the government’s fuel subsidy will trigger a second round of sharp price increases, not only fuel, but broader commodities, locally. However, we do not expect a full lift off in July.

That said, we expect the central bank to begin raising interest rates mid this year to avert prolonged price pressure due to de-anchored expectations. Much as demand pressures remain somewhat mute, with core inflation at 2.8%, heightened expectations have the potential to turn into real pressure if prolonged.

Only the headline may have been reworked by the Khusoko staff; the rest of the content is auto-generated from NCBA Research NCBA Weekly Fixed Income – 16th May 2022

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