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Relief as inflation drops to 17-month low
The measure of changes in overall prices dropped to 7.74 per cent from 10.05 per cent in June, marking the biggest drop in the month-on-month inflation which has now shed a dozen points since November.
Inflation dropped to a 17-month low in July, setting the stage for a further reduction in interest rates to the benefit of consumers and businesses.
The measure of changes in overall prices dropped to 7.74 per cent from 10.05 per cent in June, marking the biggest drop in the month-on-month inflation which has now shed a dozen points since November.
The drop was also significant because it brought inflation below the Central Bank of Kenya’s target of nine per cent. Inflation was last below the present level in February last year when it was at 6.54 per cent.
The Kenya National Bureau of Statistics (KNBS) noted that all the major components of the Consumer Price Index including food, transport, and housing recorded a decrease on year-on-year basis last month.
The drop sets the stage for further reduction in lending rates after banks lowered their base rates by between one and two percentage points in recent weeks.
Barclays, KCB and Equity are some of the major lenders that have lowered their base lending rates, with a promise of further cuts.
“We are ready to lower our interest rates as the macroeconomic environment improves,” said Martin Oduor-Otieno, KCB’s chief executive.
Commercial bank lending rates shot to above 25 per cent towards the end of last year from a low of 14 per cent in January 2011 as lenders moved to protect margins.
The expensive credit has put off borrowers, with total loans in the banking industry standing at Sh1.29 trillion after growing by a marginal four per cent from March.
The lower uptake of loans has slowed down economic activity, with the first quarter GDP shrinking to 3.5 per cent compared to 5.1 per cent in a similar period last year as the financial services, hospitality, and construction sectors recorded major contractions.
KNBS said the food and non alcoholic drinks index –the heaviest weight in the CPI—recorded the biggest drop of 1.88 per cent in July compared to the previous month.
“This was mainly due to continued falls in prices of several food products such as sukuma wiki, milk, potatoes, tomatoes, cabbages, onions, beans, green maize and spinach,” KNBS said in a statement.
The housing, water, electricity, gas and fuel index — the second in the CPI weight—also fell by 0.22 per cent in the same period, with KNBS attributing the drop to cheaper fuels and a stronger shilling which ultimately cooled off electricity costs.
The transport index — the third heaviest in the CPI weighting — decreased by 1.35 per cent on lower costs of petrol and diesel which are now retailing at new lows.
Mid last month, the Energy Regulatory Commission (ERC) cut the maximum price of a litre of super petrol in Nairobi to Sh108.39 from Sh117.67 while reducing that of a litre of diesel to Sh97.50 from Sh105.51.
The price of kerosene per litre, a major item in the budgets of poor households, dropped to Sh74.40 from Sh83.20.
Petroleum fuels remain Kenya’s largest import item that accounts for about 27 per cent of the total bill, with the drop in the cost of the products having a broad positive impact on the economy.
Cheaper diesel, petrol and kerosene means cheaper energy for households and manufacturers who are able to reduce the cost of their products. The lower import bill also eases pressure on the local currency.
“Manufacturers who had passed on the higher costs of doing business in recent months now have an opportunity to lower their prices,” said Pradeep Paunrana, the chief executive of cement firm Athi River Mining.
He said those who had absorbed the costs would benefit through improved margins.
Lower interest rates, however, remain vulnerable to the current account deficit and the negative impact of the Eurozone crisis on the exports sector including tourism and commodities.
The current account deficit, which stood at 11.3 per cent of the GDP in May, is still high despite falling marginally from 11.4 per cent the previous month with the MPC saying its deterioration could ramp up domestic prices.
