The cost of living is likely to inch below eight per cent this month, averaging within government target of 7.5 per cent by year end, analysts said yesterday. The shilling has also been projected to remain stable owing to increased involvement of foreign investors in securities market.
Abdi Mohammed, a research analyst at Stanbic Investment Management Services(SIMS)said the 8.29 per cent rise in prices of goods and services in September was a one-off adjustment after the Value Added Tax Act 2013 was effected. Clarification of the controversial law by Kenya Revenue Authority after presidential directive on September 17 has helped restore relative certainty and stability in prices, he said.
"We expect inflation rate to come down this month and average at between six and 7.5 per cent for the year," Mohamed said in a telephone interview. The shilling depreciated against the US dollar for the second straight day on Thursday after a week-long rally to Tuesday. Data from the Central Bank quoted the shilling 0.5 per cent weaker yesterday, exchanging at 86.79 down from 86.37 on Wednesday.
The slight weakening over the days interrupted a week-long gain that withstood deadly four-day terrorist siege at upmarket Westgate Shopping Mall in Nairobi from September 21. The rally was spurred by dollar inflows following the successful auction of the Sh20 billion-tax exempt infrastructure bond on October 25, according to corroborating daily updates by African Banking Corporation and NIC Capital.
Forex traders said the depreciation was as a result of increased demand for dollars by importers and commercial banks to fund increased importation of heavy machinery in ongoing infrastructural projects, and traditional oil imports that accounts for 30 per cent of the inflows. "We don't expect much weakening though because there is equally increased dollar inflows," Mohamed said, citing growing interest in East African Community and heightened activity in stock and debt markets by foreign investors.
In a policy note on Tuesday, the Central Bank said the local currency was prone to supply constraints emanating from a growing current account deficit standing at about 10 per cent of gross domestic product(GDP).
"Policies and programmes that support the growth of exports as well as the economy's productive capacity remain the main sustainable solution to narrowing the current account deficit and dampening its effects on the exchange rate movements, and hence domestic price stability," the chief dealer said.