By James Anyanzwa
Citibank NA is predicting a tough year for Kenya with the cost of living soaring to double digits. The US-based multinational expects inflation in to peak to 13.1 per cent by the end of 2011.
While the Central Bank of Kenya forecast the general rise in prices of goods and services in the country to stabilise at about 7.5 per cent this year, economists at Citibank say inflation would only fall to this level in the middle of next year (2012).
"Citi’s view is that inflation will only fall to this level in the middle of 2012.We forecast that inflation will average 13.1 per cent for the year," said David Cowan, the bank’s economist for Africa.
Surging food and fuel prices pushed Kenya’s inflation rate to 12.95 per cent in May, while the shilling tumbled to a record low, swinging around the Sh90 mark to the US dollar. The overall inflation rate for June stood at 14.49 per cent, a fact attributed to increased food and fuel prices, according to the latest figures from the Kenya National Bureau of Statistics (KNBS).
Consequently CBK adopted a tightening stance in March by raising the Central Bank Rate (CBR) rate to 6 per cent from 5.75 per cent as it moved to curb the rising inflation and stabilise the local currency.
Eye off the ball
It then raised its benchmark lending rate by a further quarter of a point in May to 6.25 per cent, and reduced the amount of cash that banks are required to hold by raising the cash reserve ratio by a similar margin to 4.75 per cent.
But Mr Cowan reckons that further increases in CBK’s benchmark lending rate are necessary in order to rein in inflation. In his presentation dubbed, "Kenya and Africa 2011-2012: Politics and Inflation move centre stage," Cowan argues that inflation worries have become more widespread, and the rising cost of living — especially, in emerging markets — partly reflects temporary supply disruptions to food and oil prices.
He says the rise in inflation is also, in part, a classic symptom of rising capacity use and loose monetary policy in these countries.
Cowan says Governments/central banks seem to have taken their eyes off the inflation ball, and have left the monetary policy to be loose for a prolonged period, and are further exacerbating the situation by not tightening it fast enough.
"Moreover, fiscal policy has also been loose and is only being tightened slowly. Exchange rates have been much weaker, magnifying the costs of imported inflation," he says. But Cowan does not expect much monetary policy tightening in Kenya in 2011-12 as agreed with the International Monetary Fund, due to the rapid approach of the elections period next year, and the need to implement the changes required under the new Constitution.
