Businesses upbeat inflation to ease as client orders rise

Kenyan businesspeople expect inflation to ease in the coming months, lowering the cost of inputs at a time they are recording an increase in new orders from clients.

According to the Standard Chartered-MNI Business Sentiment Indicator (BSI) survey for January, businesses are also optimistic interest rates will come down in the near-term given they expect Central Bank will eventually ease the monetary policy.

January’s BSI as a result rose 1.3 per cent month-on-month to 63.9, although the positive sentiment was somewhat tempered by concerns over production capacity and availability of credit.

“Two of the five components of the BSI – new orders and order backlogs, which together account for 50 per cent of the headline indicator – increased in January. Declines in some components in January may be due to seasonal effects. Alternatively, they may signal a more cautious outlook,” said Standard Chartered chief economist for Africa Razia Khan.

“The Kenyan authorities forecast real GDP growth of more than six per cent in 2016; the BSI findings suggest that while the economy is certainly expanding, it may be too early to draw firm conclusions regarding final outcomes.”

Inflation for January fell to 7.78 per cent from 8.01 per cent in December, and being largely driven by food prices, is expected to ease further as the negative effects of the El Niño rains ease.

According to Ms Khan, the decision by Central Bank of Kenya (CBK) to retain the Kenya Banks Reference Rate (KBRR) unchanged at 9.87 per cent should boost lending, meaning that sentiment around this issue is likely to improve this month.

Businesses had shown less hope that interest rates would come down in the survey December survey, having expected CBK to tighten policy further.

READ: Study shows fall in business confidence

However, the decision by the MPC on January 20 to hold steady not only the base lending rate (CBR) at 11.5 per cent but also the KBRR has contributed to this change of sentiment.

CBK governor Patrick Njoroge said after the MPC meeting that the KBRR would have been raised to 10.78 per cent under the calculation formula which takes into account the average of the CBR and the average 91-day Treasury bill rate in the past six months.

CBK chose to overlook the change given the high-interest rate spread that banks are enjoying at the moment, standing at 9.7 per cent.

The businesses maintained their belief that the shilling exchange rate will be more stable in the coming months compared to the case in 2015, with depreciation more measured.

READ: Businesses see shilling staying stable in the first half

The lower price of oil has removed some of the import pressure that strains reserves, although the pass-through effect onto pump prices has not been fully felt by consumers.

Export earnings, which should buffer the currency against such pressure, were not robust in 2015, coupled with lower inflows from tourism.

Businesses surveyed by Standard Chartered, however, said that they saw a pick-up of export orders in January.

“Current conditions (of export orders) increased to their highest level since August 2015 at 59.6, while future expectations increased to 75.5. This may reflect a lagged positive impact from currency depreciation in half two of 2015, and sound growth prospects for regional trading partners,” said the lender in the BSI.