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CBK warns of tough times ahead due to high fuel prices

NEWS
By Dominic Omondi | September 29th 2021
According to EPRA, the new prices were inclusive of eight per cent value-added tax. [Courtesy]

Central Bank of Kenya (CBK) has said that high food and fuel prices, and taxes will continue to put pressure on livelihoods.

In a statement yesterday, CBK’s Monetary Policy Committee (MPC), the bank’s highest decision-making organ, noted that the overall increase in prices of goods and services has largely spiked due to a jump in the cost of fuel and food.

“Inflation pressures are expected to be elevated in the near term, mainly driven by increases in fuel and food prices, and the impact of the recently implemented tax measures,” the statement said.

This comes at a time when Kenyans are decrying high prices of fuel with a litre of petrol rising to a record high of Sh134 per litre.

While the high cost has been attributed to the rising price of crude oil, the myriad taxes on the products have only aggravated the situation.

The food index, or food inflation, increased to 10.7 per cent from 9.1 per cent in August 2021 compared to 6.5 per cent in July, mainly due to higher prices of tomatoes, cabbages, Irish potatoes, cooking oil (salad), beef with bones and bread.

“This was mainly attributed to dry weather conditions and supply constraints,” said MPC.

Cabbages on display at Naivas Supermarket. [Wilberforce Okwiri, Standard]

In July, CBK Governor Patrick Njoroge, for the first time, admitted that the tax measures introduced in the Finance Act, 2021 would have far-reaching effects on the cost of living.

He said the apex bank’s calculation had shown that the tax measures and their indexation in the cost of living index, technically known as the Consumer Price Index (CPI), would push up the prices of items in the economy by 1.78 per cent.

“If everything else was flat, meaning all other prices were not changing and the only change was due to these taxes and indexation, then inflation would be 1.78 percentage points,” said Dr Njoroge in his post-MPC briefing.

“That is the overall impact in terms of those measures.” 

MPC, whose work is to regulate the supply of money and interest rates, yesterday retained CBK’s benchmark lending rate at seven per cent. The committee has kept the benchmark rate at seven per cent 11 times in a row, aimed at reducing the cost of money that commercial banks can lend cheaply to the private sector.

However, inflation is expected to remain within the target range with muted demand pressures. The inflation target for CBK is between 2.5 and 7.5 per cent.

Non-food and non-fuel inflation, which is an indicator of the extent to which money is chasing goods in the economy, has remained muted.

Overall inflation stood at 6.6 per cent in August compared to 6.5 per cent in July, largely due to increases in fuel and food prices.

Credit to businesses and households increased to seven per cent in August year-on-year from 6.1 per cent in July, the CBK statement said.

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