Inflation jumps in August, raises likelihood of interest rate hike

Rising food prices helped push up Kenya's inflation rate in August to its highest level since June 2012, the statistics office said on Monday, making it more likely that the central bank will lift interest rates in coming months.

Year-on-year inflation rose to 8.36 per cent in August from 7.67 per cent in the previous month, the Kenya National Bureau of Statistics said in a statement. On a monthly basis, inflation rose 0.94 per cent from July.

"With the (central bank rate) currently at 8.5 per cent, we believe there is room for a modest rise in the policy rate by the end of the year," said Razia Khan, head of research for Africa at Standard Chartered Bank.

The central bank's Monetary Policy Committee (MPC) is due to meet on Wednesday to set rates and decide how to tame inflation. The year-on-year inflation rate was above the central bank's preferred medium term range of 2.5-7.5 per cent and also just higher than the consensus forecast of 7.89 per cent.

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The statistics office said the Food and Non-Alcoholic Beverages Index was up 1.75 per cent from July, while the Transport Index was up 0.73 per cent.

Khan said year-on-year inflation was expected to slow in September due to a base effect from a value-added tax law passed last year, then pick up after that.

"Today's CPI print will serve as a timely reminder that the room for any interest rate easing – even much more of a downward drift in short-term market rates - is limited," Khan said.

At its last meeting in July, the central bank held its benchmark lending rate at 8.50 per cent, saying inflation remained in its target range and the pace of price rises had slowed.