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Food prices to keep Kenya’s inflation above CBK target

A shopper at a supermarket in Nyeri. Runaway food prices have sent inflation soaring. FILE PHOTO | NMG
A shopper at a supermarket in Nyeri. Runaway food prices have sent inflation soaring. FILE PHOTO | NMG 

Kenya’s inflation is likely to remain above the upper limit of the government’s target this year on lingering effects of the higher food costs, analysts have projected.

Economists at Citi Research say the Central Bank of Kenya will struggle to reverse average overall inflation to below 7.5 per cent because of the runaway prices of food, which monetary policy has little control over.

The Treasury requires the CBK to give an explanation whenever the overall inflation falls outside the 2.5-7.5 per cent target band.

“The poor performance of the agricultural sector has meant that inflation, driven by food price inflation, has remained elevated in Kenya in the first half of this year, which coupled with the political uncertainty has meant that consumption has generally remained under pressure,” Citi analysts say Africa Economics & Strategy Weekly report.

“Moreover, with the passage of the Banking Amendment Act in late 2016, the Central Bank of Kenya has been stuck in a dilemma about how to effectively respond to this.”

CBK governor Patrick Njoroge admitted barely a week following the enforcement of the interest rate cap on September 14 last year that the law “complicates” the effectiveness of monetary policy, the tool the bank uses to maintain price stability.

Inflation has averaged 9.25 in eight months through August, data from the Kenya National Bureau of Statistics shows.

The impact of the overall political uncertainty and the lack of monetary policy direction, Citi says in the report, has, however, not weakened the shilling, thanks to a healthy foreign exchange reserves position.

The forex reserves last week remained stable at $7.48 billion (Sh768.12 billion), or 4.97 months of import cover, well above the statutory requirement of four months of import cover.

The shilling exchanged at 102.70 units to the US dollar in early trade Tuesday, according to the CBK indicative rates, the highest level since March 16 when it traded at 102.81.