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Iran tiff seen slamming brakes on key rate cut

Inflation
Inflation has been creeping up, touching a four-month high of 5.82 percent in December. FILE PHOTO | NMG 

The renewed risk of global economic shocks following a sharp rise in tensions in the Middle East is likely to see local policymakers adopt a more cautious attitude towards monetary easing.

Following the killing of an Iran military general by the US on January 3, the possibility of conflict in the Middle East has seen volatility creep back into oil prices, threatening global growth.

The price per barrel of crude has oscillated between $65 and $72 in the past two weeks.

Oil importers like Kenya are, therefore, looking at higher import bills if higher prices take hold, with the attendant inflationary pressures as this is passed through to consumers.

Economists at NCBA said in a fixed income analysis the central bank’s Monetary Policy Committee, which cut the base lending rate by 50 basis points in November, is, therefore, likely hold the policy rate at 8.50 percent when it convenes on January 27.

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“While the Kenyan economy has successfully shrugged off global shocks in recent years, a surge in oil prices will inevitably put some breaks to growth through higher cost of production, potential currency weakness and weaker consumer spending due to high inflation,” said NCBA in the report.

Inflation has been creeping up, touching a four-month high of 5.82 percent in December, further hurting the case for another rate cut.

“Additionally, the resultant inflationary pressures and broader uncertainty may invite caution among policy makers who may adopt a wait and see stance as they monitor the evolution of the said risks and other threats to the economy,” said the economists.

In the November meeting, the MPC resolved to cut the rate in a bid to stimulate private sector credit growth after the successful repeal of the rate cap law, as well as stability in the exchange rate and inflation.

The regulator appreciated that global uncertainties remain a factor, saying that the MPC would continue to monitor developments in the global and domestic economy, taking appropriate measures.

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