Relief as inflation drops to 17-month low
Posted Tuesday, July 31 2012 at 21:16
Inflation dropped to a 17-month low in July, setting the stage for a further reduction in interest rates to the benefit of consumers and businesses.
The measure of changes in overall prices dropped to 7.74 per cent from 10.05 per cent in June, marking the biggest drop in the month-on-month inflation which has now shed a dozen points since November.
The drop was also significant because it brought inflation below the Central Bank of Kenya’s target of nine per cent. Inflation was last below the present level in February last year when it was at 6.54 per cent.
The Kenya National Bureau of Statistics (KNBS) noted that all the major components of the Consumer Price Index including food, transport, and housing recorded a decrease on year-on-year basis last month.
The drop sets the stage for further reduction in lending rates after banks lowered their base rates by between one and two percentage points in recent weeks.
“We are ready to lower our interest rates as the macroeconomic environment improves,” said Martin Oduor-Otieno, KCB’s chief executive.
The cuts came after the Central Bank of Kenya slashed its signal lending rate by 1.5 percentage point to 16.5 per cent last month on the premises that inflation would continue to ease and the Shilling to stabilise at the current levels of between Sh84.7 and Sh86 to the US dollar.
Commercial bank lending rates shot to above 25 per cent towards the end of last year from a low of 14 per cent in January 2011 as lenders moved to protect margins.
The expensive credit has put off borrowers, with total loans in the banking industry standing at Sh1.29 trillion after growing by a marginal four per cent from March.
The lower uptake of loans has slowed down economic activity, with the first quarter GDP shrinking to 3.5 per cent compared to 5.1 per cent in a similar period last year as the financial services, hospitality, and construction sectors recorded major contractions.
KNBS said the food and non alcoholic drinks index –the heaviest weight in the CPI—recorded the biggest drop of 1.88 per cent in July compared to the previous month.
“This was mainly due to continued falls in prices of several food products such as sukuma wiki, milk, potatoes, tomatoes, cabbages, onions, beans, green maize and spinach,” KNBS said in a statement.
The housing, water, electricity, gas and fuel index — the second in the CPI weight—also fell by 0.22 per cent in the same period, with KNBS attributing the drop to cheaper fuels and a stronger shilling which ultimately cooled off electricity costs.
The transport index — the third heaviest in the CPI weighting — decreased by 1.35 per cent on lower costs of petrol and diesel which are now retailing at new lows.