Kenya inflation slide signals lending rates fall

Declining food and transport prices pushed overall inflation lower for the sixth consecutive month in May to 12.22 per cent, edging it closer to the single digit level.

The Kenya National Bureau of Statistics numbers show the fall this month inflation relative to May last year was, however, the slowest since January, when it fell 62 percentage points to 18.31 per cent from December, after which it began a series of relatively higher decreases in the following months.

Despite the latest fall in the overall inflation, an increase in the overall price level showed pressure on prices was yet to fall substantially, indicating that the Monetary Policy Committee would take a cautious approach to easing interest rates. Some analysts predicted no more than one percentage point reduction in the Central Bank Rate to 17 per cent – saying that time for a drastic cut had not yet been reached.

But they acknowledged that the MPC could make a decision to maintain high rates due to forex rate volatility.

(Read: Kenya shilling weakens to a four-month low)

The Consumer Price Index – which indicates the overall price level from month to month – was 134.09, 0.35 percentage points higher than April showing that prices rose but by a small margin. Inflation is calculated as the percentage change in price levels with the reference level being the figure of same month last year.

Food prices and non-alcoholic beverages fell to 14.58 per cent in May from 16.24 per cent in April – relative to the same months last year. This was a 1.66 percentage point drop compared to the level in April.

Transport costs also fell to 8.42 per cent from 10.13 per cent in the previous month.

Easing cycle

But routine household maintenance, furnishings and household equipment rose to 12.58 per cent in May from 10.86 per cent in April. Razia Khan, an economist at the Standard Chartered Bank said that “things were finely balanced at the moment” but the issue was how comfortable the authorities felt about the overall inflation trends and risks to forex rate in initiating an easing cycle.

“Inflation has come down nicely from the peak in November of 19.7 per cent. But a fair share of this slowdown is due to a base effect,” said Yvonne Mhango, sub-Saharan economist at Renaissance Capital in Johannesburg. “The CBK will want to see more evidence of a core inflation slowing before easing monetary policy.”

girungu@ke.nationmedia.com