The drop in inflation rate has renewed calls for the Central Bank to ease its monetary stance in next week’s sitting to make loans more affordable for borrowers.
The Kenya National Bureau of Statistics announced yesterday that the year-on-year inflation rate had dropped to 4.14 per cent in October from 5.32 per cent in September.
The head of research on Africa at Standard Chartered Bank, Razia Khan, said the big gap that had opened up between the Central Bank Rate, now at 13 per cent, and the inflation rate gave good reason for a significant rate cut.
“With a vast differential now opening up yet again between Kenya’s policy rate and the rate of inflation, the focus will now shift to just how aggressive a rate cut we will see from the CBK next week,” said Razia Khan.
StanChart had predicted that inflation would fall to 4.75 per cent in October.
She attributed the higher-than-predicted fall in inflation rate to the base, which was high in the same month last year when it was at 18.9 per cent.
However she warned that the MPC should move cautiously given the high current account deficit and the risk to depreciation of the shilling.
“The arguments for a measured response still hold. Although we expect inflation to improve even further in the very near term — the base will have a lot to do it — the bigger picture will need to be taken into account,” she said.
A key consideration is where rates eventually bottom out, she said, adding that in view of the current account deficit and Kenya’s growth outlook in an election year this should be at a higher level than during the last cycle.
In the last easing cycle ending early March last year, the CBR came down to 5.75 per cent before beginning to rise.
“The immediate need for the authorities is to rebuild the relationship between the policy rate and market interest rates, which have been subject to upward pressure because of measures to sterilise liquidity,” she said.
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