The Central Bank of Kenya (CBK) is set to hold its monetary policy committee meeting (MPC) on Wednesday against the backdrop of 58-month high inflation and a weakening shilling.
A jump in the prices of essential commodities, including cooking oil, flour, and cooking gas, on the back of the war in Ukraine has squeezed household budgets and weakened the purchasing power of a majority of Kenyans.
At its last bi-monthly meeting in May, the inflation-targeting MPC raised its policy lending rate by half a percentage point to stem rising inflation and stabilise the shilling. This was the first hike by the MPC in nearly seven years.
Already banks have received the signal and started increasing the cost of their loans in line with this policy. A new increase will see interest rates rise above 15 percent, ending the era of cheap loans for many Kenyans.
The increase in the central bank rate (CBR) to 7.50 percent matched the expectations of most analysts who reckoned the policy rate would rise further in the coming months.
The rise in the cost of living in Kenya has caught the eye of the International Monetary Fund (IMF), which is now asking the CBK to consider tightening the base rate further to limit spillover effects such as demand for higher wages by workers.
There are fears the widely expected further tightening of liquidity might hurt access to credit for individuals and companies.
But analysts point out that the longer-term benefits of preserving stability for households and businesses outweigh any short-term costs.
“The key for central banks is to act quickly and decisively before inflation becomes entrenched,” the Bank for International Settlements, known as the bank for central banks, said recently.
“If it does, the costs of bringing it back under control will be higher. The longer-term benefits of preserving stability for households and businesses outweigh any short-term costs.”
The IMF said recently it was concerned that this rise in food and energy prices would spill over to other goods, particularly fuel, and services that have a big pass-through effect on transport costs.
“The Central Bank of Kenya’s recent monetary policy tightening is welcome. The CBK should stand ready to continue to adjust its stance to limit second-round effects from higher food and fuel prices and to keep inflation expectations well-anchored amid a temporary increase of inflation above the target band,” said Antoinette Sayeh, IMF deputy managing director and acting chair of the board.
The CBK governor Patrick Njoroge, also MPC chairman, noted a “clear and present danger” of inflation punching above the upper limit of 7.5 percent in May.
“We will take all measures necessary to deal with inflation. But it is clear that on supply-side-driven inflation [growth in the cost of commodities], there’s virtually nothing that monetary policy can do. What monetary policy does is to deal with second-round effects,” said Dr Njoroge.
“The Committee noted the elevated risks to the inflation outlook due to increased global commodity prices and supply chain disruptions, and concluded that there was scope for a tightening of the monetary policy in order to further anchor inflation expectations.”
Kenya’s inflation — a measure of annual changes in the cost of living— hit 7.9 percent in June from 7.1 percent in May, the Kenya National Bureau of Statistics reported. This is above the 7.5 percent target by the CBK.
This was the first time year-on-year inflation crossed the upper limit of 7.5 percent since August 2017 when it climbed to 8.04 percent on a biting drought at the time.
The State mid this month struck a deal with millers to cut the price of maize flour to Sh100 under a Treasury-backed subsidy.
President Uhuru Kenyatta in mid-July also took charge of the fuel price review ahead of the August 9 polls as he sought to ensure that public anger over fuel does not snowball into a political crisis.
The exchequer took a big hit from the State House decision to keep the prices unchanged in the month to August 14 to defuse public outrage as Kenyans go to the ballot.
The weakening of the shilling has triggered fears of a fresh round of inflationary pressure, which has become a political headache for the government that has recently been forced to offer subsidies to diffuse social tension.