Experts warn of inflation risks despite price cool down


Experts warn of inflation risks despite price cool down

In Summary

  • The Kenyan economy remains the subject of inflationary pressures in the near term in spite of a significant cool down in the growth of consumer prices most recently.
  • Consumer prices have consistently kept within the government targeted band of between 2.5 and 7.5 percent abiding by the National Treasury conditions for the execution of fiscal strategy.
  • Even so, the interest rate capping regime has against the odds played a significant role in muting the growth of consumer prices.

Experts have warned of downward risks from inflation in spite of a significant cool down in the growth of consumer prices in recent months.

Food-fuel costs, which carry the significant load in impacting inflation, have fallen most recently, offsetting notable upheavals at the start of the year.

Stability in the cost of food has been propped further this week by the Meteorological department’s projection on substantive short rains which partly assures of a satisfactory availability of agricultural produce.

Even so, economist Edward Kusewa warns the effects of the delayed long-rains season may not have in entirety filtered through the economy, signaling the chance of additional shocks in the short-run.

“Inflation shocks from earlier in the year are likely transferable into the latter parts. The damage from drought is already done in most parts of the country, and so, short-rains are in no way an indication of a bounce-back,” he said.

Meanwhile, optimal food production is no assurance to inflation suppression over time with past periods of bumper harvests including 2018 having failed to hold back the rapid expansion in consumer prices.

“Inflation does not necessary follow the production cycle. Prices were consistently low in the first half of the year but we should expect a gradual rise into the first part of next year,” reckoned Tegemeo Institute Research analyst Timothy Njagi.

While the short rains will come in handy to round off productivity in the second half of the year, Mr. Njagi expects imports to sustain the availability of key products such as maize as optimal productivity is largely ascertained over the now doubtful heavy rains season.

‘Inflation caps’

In spite of spikes to the inflation rate, consumer prices have consistently kept within the government targeted band of between 2.5 and 7.5 percent abiding by the National Treasury conditions for the execution of fiscal strategy.

The lengthy hold of the rate in the bracket has seen Treasury retain the target band over the 2019/20 financial year.

Even so, the interest rate capping regime has against the odds played a significant role in muting the growth of consumer prices.

While the regime was instilled by Parliament to ease credit access to the private sector, the move has had a completely opposite outcome having resulted in a significant credit crunch in the economy.

Consumer demand and money in supply have been on the retreat since the implementation of the capping law in September of 2016 providing an unprecedented check on the growth of consumer prices.

The caps have in effect cannibalized the Central Bank of Kenya (CBK) monetary policy setting role having kept interest rates at a low and a flat four percent above the Central Bank Rate over the last three years.

August inflation rate fell to a five month low-five percent having risen by a mere percent over the last year according to consumer price index (CPI) tracking by the Kenya  National Bureau of Statistics (KNBS).

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Story By Kepha Muiruri
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