Power, flour prices to push inflation above CBK target
Maize flour on sale at a supermarket. The average price has gone up to Sh120. PHOTO | FILE
What you need to know:
Central Bank of Kenya (CBK) recently exuded confidence that inflation would remain within the preferred range of five per cent plus or minus 250 basis points.
The sharp rise in the cost of Kenya’s staple flour has however raised concern.
Kenyans are also paying more for electricity due to higher uptake of thermal power.
The country’s January inflation increased to 6.99 per cent from 6.3 per cent in December.
Citi Africa economist David Cowan has also cautioned that Kenya’s monthly inflation is likely to average above seven per cent this year.
Higher maize flour and electricity prices are likely to push the country’s headline inflation over Central Bank’s upper target limit, analysts have warned.
NIC securities analysts say in a new macroeconomic outlook note that a sustained increase in food and power prices on the back of the prevailing drought could push the country’s inflation above the 7.5 per cent level in coming months.
The stance taken by the analysts differs with that of the Central Bank of Kenya (CBK), which in its recent Monetary Policy Committee (MPC) meeting exuded confidence that inflation would remain within the preferred range of five per cent plus or minus 250 basis points.
The sharp rise in the cost of Kenya’s staple flour has however raised concern. The price of a two-kilogramme packet of maize flour has gone up from an average of Sh90 in December to Sh120.
Kenyans are also paying more for electricity due to higher uptake of thermal power due to falling water levels in hydropower dams. The fuel levy component on power bills stands at Sh2.85 per unit since December, which is a 16-month high.
“The effects of the inadequate short rains received in October and December have started being felt, as maize flour prices have increased… Kenya remains reliant on hydroelectricity, which represents 50 per cent of the installed capacity as of 2016. The inadequate rains are therefore going to affect dam levels, necessitating a switch to the more expensive thermal energy. Upside risk will also emanate from higher electricity prices,” reads the NIC note.
The country’s January inflation increased to 6.99 per cent from 6.3 per cent in December, mainly under the weight of food and fuel cost increases.
The MPC, however, left its benchmark lending rate unchanged at 10 per cent in its January 31 meeting, with the governor Patrick Njoroge saying that the committee does not see inflation going up dramatically this year.
“The committee concluded that inflation was expected to remain within the government target range in the short term,” said Dr Njoroge, citing a decline in core (non-food-non-fuel) inflation between November and December.
“However, the committee noted increased uncertainties with regard to the prevailing drought conditions and risks in the global markets. The MPC therefore decided to retain the CBR at 10 per cent in order to anchor inflation expectations.”
Earlier this month, analysts at Britam Asset managers also warned that an extension of the drought currently beyond next month poses inflationary risks to the economy, with the attendant impact on food supplies and power production. “We expect the above factors to culminate in upward pressure on overall inflation in 2017. Inflation will therefore trend towards the upper range of CBK’s target in 2017,” said the Britam analysts.
Citi Africa economist David Cowan has also cautioned in the firm’s latest economic note on Africa that Kenya’s monthly inflation is likely to average above seven per cent this year, with pressure coming from higher food prices.
“Overall we expect inflation to remain under control in 2017, but the possibility of a more sustained increase in food prices cannot be discounted,” said Mr Cowan.
“We forecast an average annual inflation rate of 7.1 per cent in 2017, with a year-end rate of 6.3 per cent. This is marginally higher than in the last three years.”
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