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Upside risks to Kenyan inflation low: MPC

By on September 25, 2009

Kenya’s Monetary Policy Committee (MPC) believes price rises are being driven by short-term supply-side factors such as drought, so the upside risks to inflation are low, the central bank said on Friday.

In a statement about its decision to leave interest rates unchanged on Wednesday, the central bank also said the country’s statistics bureau would release new inflation measures next month, a move which analysts expect to lower headline rates.

The MPC said while risks to growth had “significantly increased” in 2009, the stimulus package unveiled in the June would spur spending and create jobs, rains would reduce power rationing and higher tea and coffee prices may boost spending.

Growth in east Africa’s largest economy slumped to 1.7 percent in 2008 from 7.1 percent in 2007. The government is predicting a modest recovery to 3 percent this year helped by infrastructure spending, but is concerned it may fall short.

“The same rain-dependent food prices that have caused inflation to rise in the past will continue to affect the cost of living in the near future. The onset of the rains will result in quick-growing foodstuffs coming onto the market,” Central Bank Governor Njuguna Ndung’u said in the statement.

LOW RISK

He also reiterated that because emergency power generation being used to alleviate outages relied on oil, there could be a significant rise in energy prices.

While the underlying inflation rate, which excludes food and energy prices slumped to 3.5 percent in August, well below the bank’s 5 percent target, headline inflation rose to 18.4 percent the same month from 17.8 percent in July.

But Ndung’u said good rains were expected from next month — key for crop production and for replenishing the dams that provide most of power for the east African country’s grid.

He also said that liquidity in the market was not fuelling, nor was likely to fuel, inflation in the near future.

“The Committee’s analysis indicated that inflation continued to be a supply side phenomenon with drought being a significant factor. Since the supply side factors to inflation were short term in nature, the Committee was of the view that the upside risks to inflation were low,” he said.

At the moment, food and non-alcoholic drinks make up half of the consumer price index basket. This is expected to be lower in the new measure, compiled by the statistics bureau to reflect shifting consumption patterns.

Reuters.

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