Prices of goods expected to go up following implementation of the VAT on petroleum products

Citrus fruits seller Rose Mureithi sets arranges fruits at her stall at the Whispers open air markets in Nyeri, February 20, 2018, even as health authorities raise an alarm that some fruit vendors were us Calcium Carbide to hasten the ripening of the fruits thus posing health risk by so doing. [PHOTO: Mose Sammy, Standard]

The rate of borrowing will remain unchanged as the Central Bank seeks to cushion Kenyans from increasing costs.

Inflation has been cited by the Monetary Policy Committee (MPC) as the reason to hold the Central Bank Rate (CBR) at nine per cent, allowing banks to continue charging a maximum 13 per cent on customer loans.

“Overall inflation is expected to rise in the near term following the implementation of the VAT (value added tax) on petroleum products in September 2018 and its impact on other prices as well as increase in international oil prices,” said CBK Governor Patrick Njoroge.

The MPC team however sees inflation remaining in the target range of between 2.5 and 7.5 per cent.

CBK said there was a need to monitor the second-round inflationary effects arising from the VAT on petroleum products and adverse effect of previous cuts now that the rate cap has been retained.

It had anticipated that the law capping rates would be removed by Parliament but legislators voted to keep the ceiling at four percentage points above the CBR but removed the floor, recommending 70 per cent of CBR on deposits.

Treasury Cabinet Secretary Henry Rotich said the rate cap conversation would not be handled as part of President Uhuru Kenyatta’s bargain on the Finance Bill but would be brought back to Parliament at a later date for reforms.

“The simple answer is we will revisit that one. I don’t mind addressing it now but we will spend two hours explaining to you how it affects the economy but it will back in the house,” CS Rotich told legislators during a committee meeting.

Pick up

Although official inflation figures are still five days away, investment bank Renaissance Capital said it expected energy inflation to pick up by nearly one or two percentage points, bringing the consumer prices towards the upper limit of 7.5 per cent.

The full MPC team was meeting yesterday after four new members - Benson Ateng, Jane Mariara, Margaret Chemengich and Humphrey Muga - were appointed last week.

Analysts were surprised that CBK had cut rates twice, knowing well that it would work against lending to the private sector.

The CBR was lowered to 9.5 per cent in May then nine per cent in July, cutting the maximum lending rate for commercial banks to 13 per cent from 14 per cent at the beginning of the year.

Banks are only allowed to charge four percentage points above the CBR.

CBK data however shows that when the rate was cut in May, credit growth to the private sector rose from 3.8 per cent to 4.3 per cent in the 12 months to August.