CBK governor Njuguna Ndung’u (left) with Javier Bolzico of Fit & Proper Consulting of Argentina (centre), and director of Deposit Protection Fund Board Rose Detho during the Kenya Deposit Insurance workshop at the Kenya School of Monetary Studies on Tuesday. A CBK survey says inflation may rise as the year progresses. Photo/Salaton Njau
What you need to know:
Most businesses expect that the economy stirring up to activity after the polls would see the inflation levels going up.
MPC report suggests the inflation rate, for the rest of the year, would be between 5.45 and 6.45 per cent.
Expectations for higher demand for goods and services as business picks up have been cited as the key reason for the rise in cost of living.
The cost of living is set to rise by as high as two percentage points as normalcy returns after elections, a Central Bank of Kenya (CBK) survey says.
Most respondents, including all the commercial banks and 50 of the 60 firms in the main industrial towns, expect that the economy stirring up to activity after the polls would see the inflation levels going up by between one and two percentage points.
The Results of the MPC Market Perceptions Survey for February 2013 report suggests the rate, for the rest of the year, would be between 5.45 and 6.45 per cent.
Expectations for higher demand for goods and services as business picks up have been cited as the key reason for the rise in cost of living. Other factors are rise in international oil prices and a likely increase in government spending “with adoption of the devolved government system,” said the study.
Data from the Kenya National Bureau of Statistics (KNBS) indicates that the rate of inflation stood at 4.45 per cent in February 2013, having risen from 3.67 per cent in January.
This could represent a new upward trend after months of decline following the late 2011 weak-shilling induced inflationary pressure and the recent rise of up to Sh4 in petrol pump prices.
The anticipated levels are above the CBK’s preferred five per cent rate and may raise the price of loans. Economists, however, say it is too premature to make estimations since there is still some political uncertainty.
“It is still a bit early since there is still uncertainty but I do not expect that there will be a drastic change in the rate,” said Nelson Wawire, the chairman of Kenyatta University’s macroeconomics department.
On the political scene, Cord whose presidential candidate emerged in second position has filed a petition challenging the declaration of Jubilee’s Uhuru Kenyatta as the President-elect. The Supreme Court has two weeks from last Saturday to hear and determine the case.
Other analysts have raised concern over the rising rate of inflation during the electoral season, a scenario that is yet to be empirically studied.
“Outside of the pressures associated with the drought in 2011, the gains in the CPI in January and February 2013 have been among the highest monthly prints seen in January and February since the new inflation series came into use. Were these results outliers, or symptomatic of a broader, more worrying trend?” posed Standard Chartered’s Africa head of research Razia Khan.
The survey, however, said that businesses may get a reprieve with the expected drop in interest rate that was a key driver of inflation in late 2011 and early 2012.
“Most banks expect lending rates to continue declining in the remainder of 2013 due to the prevailing low and stable inflation rate and improved liquidity following a gradual easing of monetary policy by the MPC,” said the survey.
Citi has also said the banks need to reduce the high rates, the key driver of the record interest income registered by banks in 2012, which they say are not tenable.
In a banking report, Citi’s analysts said the fall in Treasury bill and the Central Bank Rate (CBR) in 2012 should cue commercial banks the cue to reduce cost of money over the period.
The CBR reduced from 18 per cent to 9.5 per cent in 2012 while 91-day Treasury bill rate reduced from 19.905 to 8.138 per cent. The MPC survey informed the retention of CBR at 9.5 per cent last week.
