21 July 2014

Kenya: Analysts See Inflation Staying Within Targets

HEADLINE inflation could surpass the government's medium term upper limit target of 7.5 per cent at a point from this month, according to research analysts, but they remain confident in Central Bank's corrective measures.

Last month's inflation at 7.39 per cent was shy of the upper limit by 0.11 percentage points.

Analysts at fund manager Pinebridge Investments expect a gradual marginal rise in inflation rate in the second half of the year, with the average for the entire year forecast to remain within target.

The rise in prices of goods and services averaged 6.9 per cent for the first half of the year with June as the peak and March's 6.27 per cent as the lowest point.

"At certain periods though... the level could be beyond the target," Pinebridge's chief investment officer Nicholas Malaki said, citing higher international oil prices, a weaker shilling, seasonality and less than normal rainfall as the main threats.

"The aim for policy makers is to revert to within given average within a (short) span of time."

The last time inflation went past the upper limit target was September and October at 8.29 and 7.76 per cent respectively.

The the monetary policy reversed inflation to 7.36 per cent in November through the Central Bank Rate which has remained at 8.5 per cent since April 2013.

"There are no imminent threats to move wide off the target within the second half of the year. However, recent tariff adjustments in the energy sector is something to look out for closely," Malaki told The Star.

The fixed charge for domestic electricity consumers has jumped to Sh150 from Sh120 while the energy charge per unit(Kilowatt hour) has shot to Sh13.68 from Sh11.62 for those consuming 50 units.

A litre of petrol and kerosine has also risen by Sh1.24 and Sh0.99, respectively, in a monthly review.

"Although electricity prices are set to rise from July, the impact (on inflation) may be offset by other factors," London-based Razia Khan, the lead research analyst for Africa at Standard Chartered Bank said in an emailed response on July 7.

One of those factors is importation of 201,800 metric tonnes of maize from neighbouring Tanzania, with the first batch of 50,000 tonnes due this month, in a government-government deal agreed on July 3.

The World Bank said in a bi-annual Kenya Economic Update report that any further drought-led spike in food prices, coupled with the rise in electricity bills, could raise inflation above the target, risking macroeconomic stability, private investment and projected GDP growth of 5.8 per cent.

Khan expects the Central Bank to uphold the CBR at the present levels until December.

"Weak growth, with GDP undershooting expectations (4.1 against projected 5.2 per cent in first quarter), and a rising security threat (that slows investment momentum) should provide enough justification for the CBR to remain on hold until its December meeting," she said.

In retaining its key lending rate during a meeting on July 8, the CBK's monetary policy committee said the measure would continue to "desired price stability as overall inflation remains within the target range".

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