Weaker shilling and rise in inflation to slow down economy, survey shows
A trader sells vegetables in Nyeri. Banks are projecting that inflation rate will go up to 7.36 per cent. FILE
What you need to know:
More business executives expect shilling to depreciate and inflation to go up.
The worsening expectations were attributed to a likely increase in food prices due to drought in some parts of the country, volatile international oil prices and expected rise in electricity prices.
Economists fear stability of the economy is under threat from rapid credit growth which may require tightening by the Monetary Policy Committee.
The number of banks and other private companies expecting the shilling to weaken has risen, a Central Bank survey has shown.
The CBK’s Monetary Policy Committee’s (MPC) Market Perceptions Survey for February 2014 shows that 33 per cent of banks and 39 per cent of non-bank companies expect the shilling to depreciate, up from 31 and 20 per cent respectively last December.
“A notable proportion of the respondents indicated that exchange rate stability remains vulnerable to expected increase in imports with pick-up in economic activity and to the impact of the tapering in the economic stimulus programme in the US could reverse capital flows and cause volatility,” said the survey.
The number of those who think the currency will strengthen has been reducing at 27 per cent of banks down from 32 per cent last December.
For non-bank companies, only 14 per cent expect it to strengthen, down from 20 per cent at the end of last year. However, some foreign exchange dealers predict the opposite.
“The forecast for the next one to three months is actually having a strengthening currency. The only risk to it being weaker is the behaviour of the Federal Reserve, which again is already priced in the unit,” said KCB senior foreign exchange dealer Sheikh Mehran.
Mr Mehran said the shilling would strengthen with the floating of a sovereign bond of up to Sh172 billion ($2 billion) this year.
The unit is seen holding within the range of between Sh86.30 and Sh86.50 to the dollar with demand and supply evenly matching.
The private sector expects moderate inflation rates with banks projecting 7.36 per cent and non-banks 7.58 per cent up from 7.32 per cent and 7.10 per cent respectively at the end of 2013.
The worsening expectations were attributed to a likely increase in food prices due to drought in some parts of the country, volatile international oil prices and expected rise in electricity prices.
Increase in demand with pick-up in economic activity and the normalisation of government expenditure in the counties may also exert inflationary pressures.
Economists fear stability of the economy is under threat from rapid credit growth which may require tightening by the Monetary Policy Committee.
“Private sector credit growth is running just over 20 per cent year-on-year. Perhaps this is where risks are most pronounced. While inflation is well-behaved for now, we do see risks further out especially if growth momentum is sustained as we expect,” said StanChart head of research in Africa Razia Khan in response to the CBK decision to hold the policy rate at 8.50 per cent for the eight consecutive session.
Ms Khan said she expected the rate to be changed in the next financial year which starts in July.
“We still see the central bank rate on hold through to the middle of the year, with the need for modest tightening becoming evident in the next financial year,” said Ms Khan.
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