CBK raises the red flag over looming food shortage

A forecasted dry weather spell and frost bite in agriculture-rich parts of the country could present new risks to food supply with the possibility of reversing the recent decline in the inflation rate, the Central Bank’s Monetary Policy Committee (MPC) said after yesterday’s monthly meeting.

This view came as the policy body retained its signal rate at 18 per cent, arguing that the tight monetary policy needs to be maintained to further curb the high inflationary pressure that has started easing.

Inflation dropped from 18.93 per cent in December to 18.31 per cent last month, marking the second marginal drop after falling from a peak of 19.72 per cent in November.

The drop in the cost of goods and services has been linked to lower fuel prices, increased food production, a stronger shilling and reduced uptake of loans due to high interest rates.

Monetary policy

MPC says the tight monetary policy, which has seen interest on bank loans surge beyond the 25 per cent mark, should be supported to cool off inflation by reducing demand for imported goods and services.

MPC had raised the policy rate by nearly three-fold from 6.5 per cent in less than three months to 18 per cent December in response to a rapidly depreciating shilling and soaring commodity prices.

“This (retention of the rate at 18 per cent) will allow time for the policy measures in place to work out and deliver decisive results on inflation and inflation expectations,” Prof Njuguna Ndung’u, the chairman of MPC, said in a statement.

MPC said it expects inflation to keep falling , a view shared by analysts who anticipate a gradual cut in the policy rate as early as the second quarter.

“With inflation likely to drop decisively below 18 per cent in the coming months, the focus will nonetheless shift to when, and not if, the CBK start cutting interest rates,” Ms Razia Khan, the head of Africa Research at Standard & Chartered said in a statement.

“Our view all along had been that this may not happen until June this year.  However, given continued stability in the forex rate, as well as the precedent of Uganda having commenced its easing more formally, risks of an earlier resumption of the easing cycle in Kenya are building.”

Ms Khan said upcoming fall in interest rates will see investors rush to lock in the high returns in government debt papers as Treasury plans to borrow $600 million from international lenders.