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Inflation headache for CBK as shilling tumbles to record low

Women short variety of fruits at the Eldoret Air supermarket. [Peter Ochieng, Standard]

The Central Bank of Kenya (CBK) will meet in two days to decide whether to hold or increase its benchmark lending rate in the face of high inflation and a weakened Shilling.

The financial hardships are squeezing consumers hard, posing an economic and political problem for President William Ruto’s new administration.

This comes as global central banks continue raising interest rates, following in the footsteps of the United States Federal Reserve in a fight against inflation that is sending shockwaves through global financial markets.

 Kenya’s statistics agency is on Friday expected to publish an update of inflation numbers with the politically sensitive price pressures expected to continue amid a lingering global surge in food prices.

Ahead of release of the consumer prices data by the Kenya National Bureau of Statistics (KNBS) and the Thursday CBK meeting, the shilling yesterday plunged to an all-time low against the dollar, signaling inflation and higher cost of imported goods.

CBK data shows the shilling exchanged at an average of 120.5971 against the dollar, setting up the country for more expensive imports, electricity and debt servicing distress.

The weakening of the shilling triggered fears of a fresh round of inflationary pressure.

Inflation—a measure of annual changes in the cost of living—hit 8.5 per cent in August from 8.3 per cent in July, KNBS earlier reported. This was above the 7.5 per cent target by the CBK.

CBK in July retained the base lending rate at 7.50 per cent, shrugging off mounting jitters over the economic fallout from the Russia-Ukraine war and the General Election in August.

This spared consumers any increases in the cost of loans after the banking regulator sent its signal to banks to hold interest rates steady.

The Monetary Policy Committee (MPC) at the time said its monetary policy stance had protected the shilling and reduced the threat of money-driven inflation.

But the US Federal Reserve officials have now signalled plans to continue tightening its monetary policy, and to keep it tight for years to come, in what may for many countries including Kenya amount to a fresh financial shock as admitted by CBK Governor Patrick Njoroge recently.

 US interest rates and the US dollar serve as reference points for borrowing costs around the world.

Analysts yesterday acknowledged CBK faces a major test this week even as they remained split on its possible responses to tame the price pressures.

“CBK is in a precarious position as current inflation trends are supply driven while monetary policy action tends to target demand,” Stephanie Kimani, Economist at NCBA Bank told The Standard.

 “While we see scope for further rate hikes this year, the CBK may be reluctant to aggravate the already fragile GDP optics.”

Deepak Dave of Riverside Capital Advisory, however, said in a separate interview, that given post-election levels of liquidity in the market, the state of the shilling and external interest rate and inflationary expectations worldwide,

“The only scope is to raise rates. Anything else would lead to an even worse outcome down the line,” he said.

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