Brace Yourselves As Inflation Is Expected To Rise

The long awaited Monetary policy Committee (MPC) Meeting was held today with the agenda to review the ongoing economic developments, the outcome of the prior policy decisions and the position of both domestic and global economies.

The MPC chose to retain the CBR at the current 10.5% so as to curb the inflation expectations and maintain the stability in the market.

It was noted that in June 2016, the overall inflation increased to 5.8% as compared to 5.0% in May. However, the increase is still within the governments range.

SUMMARY

inflation
The increase in the CPI category of food and non-alcoholic beverages by 1% was as a result of a variety of food for example, cabbages, tomatoes and Irish potatoes.

Conversely, the inflation on NFNF reduced by 0.4% between the month of May and June. However the reduction of the 3-month annualized inflation by 1.9% showed that the demand pressures on the economy was minimal.

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The committee was delighted to report that the foreign exchange market has been persistently stable due to a number of factors;

  • Lower import bill
  • Stronger Diaspora remittances
  • Improved tea and horticulture exports and
  • CBK’s close monitoring of the market especially after the U.K. vote to exit the European union (Brexit)

The CBK’s foreign exchange reserves currently stand at USD7,794.1 million (5.1 months of import cover) up from USD7,682.0 million at the end of May 2016. These reserves, together with the Precautionary Arrangements with the International Monetary Fund (IMF) continue to provide adequate buffers against short-term shocks.

The banking sector continues to stabilize with improving liquidity conditions, and stable non-performing loans in May and June. The ratio of gross non-performing loans to gross loans fell marginally from 8.5 percent in May to 8.4 percent in June 2016. The CBK will continue to closely monitor credit and liquidity risks.

The FY 2016/17 Budget Statement contained increased budget allocations towards infrastructure investment, security, and irrigation projects, which should continue to improve the business environment and lower food prices in the medium term. The Budget Statement provided additional measures to address the high cost of credit, including use of movable assets as collateral, setting up of an electronic collateral registry, and the ongoing digitization of land registries. However, measures to cap interest rates would lead to inefficiencies in the credit market, promote informal lending channels, and undermine the effectiveness of monetary policy transmission.

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