The Central Bank of Kenya (CBK) expects inflation to ease in the short term on State subsidies on flour and fuel, electing to hold the base lending rate at 7.5 percent in Wednesday’s Monetary Policy Committee (MPC) meeting.
The CBK had been tipped to implement further tightening of its monetary policy by the likes of the International Monetary Fund (IMF) in order to tame further price pressures, which saw inflation breach its upper preferred limit of 7.5 percent after rising to a 58-month high of 7.9 percent in June.
The apex bank, however, opted to soften its outlook on inflation, noting that high global prices of oil, wheat, and edible oils are now easing and that the 0.5 percentage point rate increase announced in the May meeting is still transmitting through the economy and has been complemented by the government’s package of fiscal measures to moderate the prices of specific items.
“The recent waiver of import duties and levies on white maize, the subsidy on retail prices of sifted maize flour, and the recent reduction in VAT on LPG will further moderate domestic prices,” said the CBK on Wednesday.
“Additionally, the Committee noted that international commodity prices, particularly oil, wheat, and edible oils had begun to moderate. These developments are expected to ease domestic inflationary pressures in the near term.”
Local food produce prices have also eased since June, the CBK said, particularly cabbages, tomatoes, onions, potatoes, and green maize whose supply has improved.
Other key economic indicators have also supported the call to hold off from tightening the rate further, key among them the need to support credit growth which is only now starting to touch the 12 to 15 percent range that is deemed ideal to support healthy growth of the economy.
In the 12 months to June, lending to the private sector grew by 12.3 percent, up from 11.5 percent in April. Sectors recording the highest growth included transport and communication (22.2 percent), manufacturing (15.2 percent), trade (11.6 percent), and consumer durables (14.7 percent).
Concerns remain however about the deteriorating quality of the banking sector’s loan book, where the ratio of non-performing loans rose further in June to 14.7 percent, from 14.1 percent in April.
The CBK said however that the increase is not systemic, but is instead “attributable to a few large borrowers with specific challenges in the respective businesses”.
