Kenya's statistics office published core inflation data for the first time at two percent to help monetary authorities to better predict the impact of their interest rate decisions on the economy.
The core inflation, where prices of food, fuel and transport are excluded, dipped from 2.2 percent in December 2024.
The drop will provide room for the Central Bank to cut its benchmark lending rate further and signal commercial banks to lower lending rates to homes and businesses.
The Central Bank of Kenya’s Monetary Policy Committee (MPC) meets Wednesday to set the rate on the back of lowering interest rate three times in a row.
It lowered the benchmark rate by 75 basis points to 11.25 percent in December after making a similar cut in October and another25-bps cut in August.
Kenya's umbrella banking association had called for a significant cut to the central bank's policy rate to provide a strong signal to the market and enable a drop in market interest rates.
Policymakers argue it is hard to attain price stability in the economy using monetary tools when the food and fuel components of inflation are included since they are usually driven by supply side factors such as weather, which are beyond their control.
The Kenya National Bureau of Statistics (KNBS) has been focusing on headline inflation in its monthly releases, including volatile components such as food and fuel, forcing the central bank to disaggregate the data and work out the non-food and non-fuel inflation.
On Friday, the national statistician for the first time separated the price changes of volatile items —food, fuel transport— from the rest of the items in the cost-of-living basket.
Overall or headline inflation increased by 3.3 percent in January, up from the 3.0 percent recorded in December.
Consumer prices in the economy continued trending upward after touching a 17-year low of 2.7 percent in October last year.
Food inflation, which takes up huge space in the CPI, or a fixed basket of goods and services, rose by 6.1 percent while the fuel one went up by 0.7 percent in the same period.
While households reduced their spending on transport, they spent more on school fees with parents with children in private primary school paying Sh30,935, an increase of 2.8 percent from Sh30,106.14 in December.
Although consumer prices have begun to rise, they remain within the Central Bank of Kenya (CBK) range of 2.5 and 7.5 percent, largely due to lower food and fuel prices.
After tightening its monetary policy to address the high consumer prices, a move that pushed up interest rates, the CBK has been loosening its policy by cutting its benchmark lending rates to avail cheaper money into the economy.
After a lag, commercial banks made the first cut on lending rates since the CBK started slashing the benchmark rate in August last year, yielding to pressure from the banking regulator.
CBK data shows that average lending rates fell to 16.89 percent in December from an eight-year high of 17.22 percent recorded in November.
Higher borrowing costs have hit the economy hard, with several reputable forecasters, including the National Treasury, being forced to review downward economic growth projections in 2024 due to poor credit extension to the private sector.
Demand for credit contracted 1.1 percent in November compared to an increase of 3.7 percent in July —a 22-year low.
