Columnists

Why MPC needs to signal a bit of tightening stance

sukuma

Joseph Muinde, a trader prepares sukuma wiki. The price of a kilo of the vegetable rose 63 per cent. photo | Suleiman Mbatiah | nmg

What an expensive week! Milk prices pierced through the roof—I personally bought a few 500ml packets at Sh68 each. It was the first time I complained about milk prices. I never bought sugar, but I learnt that prices hit a five-year high of Sh330 per 2 kilogrammes packets.

I could see heated online tiki-taka about these developments. I mean how did we get here? For sure shelf-price surges of basic commodities, as overnight as they are, are a build-up of certain undercurrents—and whatever happened, it wasn’t an overnight occurrence.

Meanwhile, consumer prices for April rose by 11.5 per cent year-on-year. Kale (or sukuma wiki) was at the forefront of this growth, with the price of a kilo surging by 63 per cent year-on-year. These elevations in prices, however transitory, further reinforce the dilemma for monetary policymakers headed by the monetary policy committee (MPC) of the Central Bank of Kenya (CBK).

The committee in March had already indicated unwillingness to react to what they saw as transient and non-persistent shocks on food prices, choosing instead to focus on core inflation. Core inflation is simply an inflation measure which excludes transitory or temporary price volatilities as in the case of some commodities such as food items.

Behind the curve

Indeed, the current surge in sugar and milk prices is largely artificial, in my view. No need to react. But there is a risk here. An academic paper authored by Roseline Nyakerario and Olive Munene, both researchers at the CBK , titled Second round effects and pass-through of food prices to inflation in Kenya suggested presence of domestic food price pass-through to both headline (or overall) inflation and non-food non-fuel inflation.

Their empirical study suggested that core measures of inflation that exclude food inflation may not be appropriate in estimating underlying inflationary pressures, especially in countries with a large share of food products in the consumption basket such as Kenya. Essentially, MPC’s current fixation with core inflation at the expense of headline inflation maybe ruinous and they could be running a risk of being caught behind the curve.

However, on the other hand, the MPC has previously expressed grave concern with slowdown in credit growth. On this one, I think they have played into the gallery of commercial banks. The Banking (amendment) Act, 2016 disabled banks’ subjectivity in risk-pricing, triggering cherry-picking when it comes to lending. No amount of policy accommodation can alter this.

I think that eventually banks will have to grow their loan book because this is their core business. We can talk of redirection of liquidity into government securities—but this usually only offers a temporary warehouse for funds. The core business of a bank, and the basis on which its shareholders demand returns, is lending, period.

And any bank CEO who is flaunting to its shareholders the idea of buying Treasury bills and bonds should not be holding that position. Consequently, I think concerns around credit growth are overplayed, for the simple reason that it is largely artificial and not driven by real underlying demand slack.

My point is that the pendulum of risks still swings towards inflation; and to the extent that there exists evidence of domestic food price pass-through to both headline inflation and non-food non-fuel inflation, the MPC will need to signal a tightening stance in their upcoming meet, albeit by a slight margin.