Rising concerns on inflation ahead of MPC meeting

The Central Bank of Kenya (CBK) will hold its Monetary Policy Meeting (MPC) today amid concerns about the rising cost of food that has driven inflation to an 18-month high.

The prices of key food items have climbed significantly over the past couple of months, adding pressure on cash-starved households that are still reeling from the economic hit of the Covid-19 pandemic.

Kenya’s inflation rose to a year and a half high in August largely on the back of increased cost of basic foodstuffs and fuel, data by the Kenya National Bureau of Statistics report shows.

Inflation — a measure of changes in the cost of living year-on-year — climbed to 6.57 percent from 6.55 percent in July, signalling a painful cost pinch on the budgets for households and businesses amid Covid-19 knocks on earnings.

At its last bi-monthly meeting on July 28, the inflation-targeting MPC shrugged off heightened global jitters and inflation fears to retain its benchmark lending rate at seven percent for the ninth time in a row.

Some analysts say ahead of the crucial meeting that while inflationary pressure is likely to be at the forefront of the MPCs thinking, the base rate is unlikely to change for the remainder of the year, given the need to also stimulate economic growth — a conundrum that complicates the conduct of monetary policy.

“Even with inflationary risks in the near term, we still expect the CBK and its upcoming MPC to keep its policy rate on hold at seven percent,” said Standard Chartered Bank in a pre-MPC note.

An inflation adjustment of almost five percent on excise duties on items including fuel, bottled water and alcohol effective October 1 is feared to add inflationary pressures.

“Pressure on the exchange rate, current ample liquidity may favour maintenance of status quo - the central bank rate at 7.00 percent for the remainder of this year,” said NCBA researchers.