Kenya’s Inflation to Ease in 2nd half of 2023 -Analysts

Headline inflation will remain notably high in the year's first half and above the upper target of 7.50%.
Kenya's walking in the streets of Nairobi

Inflation has moderated over the past two months but still averages levels not seen in five years! In December 2022, headline and core inflation slowed to 9.10% and 4.10%, respectively, from 9.50% and 4.20% a month before.

Given Kenya’s status as a net importer, it is undeniable that a significant portion of this price pressure stems from imported inflation. Therefore, signs of waning global inflation may portend positive local implications.

This affirms our in-house baseline forecast that inflation should start to come off in the latter half of 2023 and average about 6.62% for the full year. Headline inflation will remain notably high in the year’s first half and above the upper target of 7.50%.

monetary policy tightening

As a result, the need for monetary policy tightening will diminish towards the second half. Given the pace and uncertainty of these adjustments, our in-house model suggests that there is still scope for an additional 50bps policy rate hike in 2023.

This pales in comparison to the cumulative rate hike of 175bps in 2022. To this end, the inflation and policy-induced pressure on interest rates should begin to abate by year’s end. In particular, the upward adjustment will be less significant than in 2022.

For the time being, we anticipate that the yield curve will maintain its flattening disposition. Investors will continue to increase demand for shorter maturities to cover rollover and refinancing risks.

To manage interest rate expectations, the central bank will remain keen on rejecting high-priced bids, as it has repeatedly demonstrated in the past year.

Source: NCBA Research 17th January 2023



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