Citi says low inflation gives CBK room to cut policy rate

Kenya is likely to experience modest inflationary pressure in the second half of the year, allowing the Central Bank of Kenya (CBK) further room to ease monetary policy, economists at Citi say.

Citi notes inflation in EA has fallen faster than anticipated in the first half of the year, which has allowed the respective central banks to ease monetary policy, although there are some tentative signs that the fall will come to an end in the coming months due to food and transport price gains.

The rate of depreciation of currencies has also slowed down compared to the second half of 2015 allowing for a softer stance by regulators.

Kenya’s inflation in May stood at five per cent having eased from 5.27 per cent in April and 6.45 per cent a month earlier.

“While inflation in the region is likely to pick up from the current low levels in the second half, we do not expect the pick-up to be significant. This means that there is still potential for a further gradual easing of monetary policy…although we do expect that all central banks will remain cautious,” said Citi in the note.

Citi says that the pick-up in the world oil price may have a modest impact on inflation. Kenya for instance increased road maintenance levy by Sh6 to Sh18 on a litre of diesel and petrol in the 2016/17 budget, which on top of higher crude prices will hit motorists hard going forward.

Kenya also runs a significant fiscal deficit, which would be made worse by higher import costs for petroleum, and thus put pressure on the currency.