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Central bank tipped to go slow on monetary easing

Patrick Njoroge
Central Bank of Kenya governor Patrick Njoroge. FILE PHOTO | NMG 

The Central Bank of Kenya’s (CBK) recent monetary easing is unlikely to continue in the light of rising core inflationary pressure amid higher oil prices and taxes.

Economists at Commercial Bank of Africa (CBA) say improved economic growth is also giving the regulator headroom to adopt a tighter stance to fight price increases.

The CBK has made two cuts on the benchmark lending rate this year, a 0.5 percentage points chop in March to 9.5 per cent and a similar cut in July to the current nine per cent, both informed by benign inflation, stable exchange rate and need to spur private sector lending to boost the economy.

The regulator, however, faces the prospects of a new round of inflationary pressure, driven by higher oil prices — currently at a four-year high of $85 a barrel — and a general rise in the cost of goods and services in the country after an imposition of fresh petroleum taxes.

“With rising cost-push inflation driven by recent tax measures and rising oil prices, scope for further accommodation is likely to be limited…this (rise in oil price) is likely to invite considerable caution among central banks in oil importing countries,” said CBA analysts in their latest fixed income note.

“In addition, despite low credit growth, demand pressures have been building up.

“Core inflation accelerated to 4.7 per cent from 4.2 per cent in August. While it remains below the medium term target of five per cent, sustained build-up could invite a tightening response from the Central Bank.”

The CBA economists, however, noted that because economic growth has accelerated considerably, to 6.3 per cent in the second quarter, there is reduced pressure for stimulation from the monetary authority.

Kenya’s headline inflation in September last month rose to a one-year high of 5.7 per cent from 4.04 per cent in August, largely due to the effect of the newly introduced value-added tax on petroleum products.

The CBK Monetary Policy Committee’s (MPC) next meeting is in November, by which time the full effects of the new taxes will be apparent on the economy.

The September numbers were only partially affected by the new taxes. Tightening or easing action by the MPC has in the last two years also determined the maximum bank lending rates due to the rate cap law that pegs banks’ loan rates on the Central Bank Rate. This, some analysts have said, has had the effect of hampering the ability of the regulator to deploy its most effective monetary policy tool to control the changes in prices in the country.

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