Inflation rise slows down post-poll economic recovery

A petrol station attendant fuels a car in Nyeri town. PHOTO | JOSEPH KANYI | NMG

Recovery in Kenya’s private sector after the August general election slowed in October on rising living costs that cut demand for goods and services, prompting firms to reduce output.

Findings of Stanbic Bank Kenya’s Purchasing Managers Index (PMI) suggested Thursday that companies posted a slowdown in sales, employment and purchase of inputs compared with September.

The monthly composite survey, based on feedback from a sample of about 400 corporate managers, pointed to a broad-based slowdown in production across sectors, except manufacturing.

The contraction in output levels last month was the seventh in eight months— with September the only exception — pointing to a general slowdown in economic activities this year compared with 2021.

“Rising living costs dampened client spending in many cases, contributing to lower sales volumes in the construction, services and wholesale & retail sectors,” analysts at Stanbic Bank and American analytics firm, S&P Global, wrote in the PMI report for October.

“Agriculture and manufacturing were the only areas to record growth.”

The overall PMI reading — a gauge for month-on-month private sector activity including output, new orders and employment — dropped to 50.2 from 51.7 in the prior month.

PMI readings above 50 denote improved business conditions, while levels below signal a contraction.

“Input costs accelerated, underpinned by higher fuel prices, a weaker exchange rate, staff costs, and shortages of commodities such as timber and animal feed,” Mulalo Madula, an economist with South African-based Standard Bank, the parent firm of Stanbic Bank, wrote in the October PMI report.

“If price pressures persist and firms continue to pass on a higher share of rising input cost burdens to output charges, demand may weaken in the short to medium term, slowing the overall rate of improvement in Kenya’s business environment.” Inflation — a measure of annual growth in prices — climbed to a 65-month high of 9.6 percent in October after President William Ruto removed subsidy on petrol, and reduced the cushion on diesel and kerosene.

The inflationary pressures are largely coming from increased costs of food and energy in a net import economy with increased expenditure on goods from abroad weakening the shilling further against the globally bullish US dollar.

Elevated inflation prompted the Central Bank of Kenya’s monetary policy committee to raise benchmark lending rate by 75 basis points to 8.25 percent end-September. This was a signal to banks to raise cost of money and “anchor expectations” in further rise in the cost of living measure. Analysts expect the CBK to further raise interest rates later this month, citing persistent price growth.

“The central bank hiked rates by 75bp [basis points], to 8.25 percent, at its last meeting and more tightening is on the cards,” Virág Fórizs, an Africa-focused analyst for UK-based Capital Economics wrote in a note on Kenya on October 31.

While the signal on interest will not reverse the current inflationary pressures which are largely coming from soaring food and fuel prices which are supply-driven, higher interest rates impact second-round effects like when firms pass on higher input costs to final consumers.

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