@BusinessDaily

NEWS INDEPTH: Banks, businesses foresee moderate inflation

1 months ago, 7 Nov 18:30

By: Charles Mwaniki

Banks and private sector companies expect the cost of living to rise, but remain contained within the preferred Central Bank of Kenya (CBK) range in the next one year, betting on stable food prices and muted spending pressure due to slow private sector credit growth.

The respondents in CBK’s market perceptions survey of September foresee only a gradual increase in prices of basic consumer goods and services, although their cautious optimism is likely to be tested if oil prices rise in the global market, which would have a significant downstream effect on the Kenyan economy.

The CBK, whose main mandate is price stability, prefers the rate of inflation to remain between 2.5 and 7.5 percent.

The introduction of value Added Tax (VAT) on petroleum products, as well as some basic food items, had been expected to push prices up significantly, but the fall in inflation, the cost of living measure, from 5.7 percent in September to 5.53 percent last month has eased some of these concerns.

The CBK polled a total of 377 companies, comprising 40 commercial banks, 13 microfinance banks and 324 private sector firms, the latter including 45 hotels, for the survey. The overall response rate was 67 percent.

“All respondents expected the increase in inflation to come from the direct impact and second round effects of the VAT on petroleum products, and from the rising international oil prices,” says CBK in the survey report.

“Inflation over the next 12 months, is however, expected to be moderated by the forecast adequate rainfall in most parts of the country, the stable macroeconomic environment, and the slow private sector credit growth.”

"Part of the reason prices have not risen as fast as was expected is due to the low private sector credit growth."

The CBK data shows that credit to the private sector grew at a steady 4.3 percent in June, July and August, but while this is better than the lows of 1.4 percent witnessed during a similar time last year, it is still far below the 12-16 percent range thought to be ideal to spur inclusive economic growth.

In the survey, banks had expected only gradual growth in credit, but it is worth noting that the survey was done before the amendments to the rate cap law in the Finance Act, 2018, which have done away with the deposit rate floor on interest earning accounts.

This should ideally increase the banks’ interest margins. The jury is, however, still out as to whether this will spur an increase in lending, given that maximum allowed loan rates are still at near par with the risk free government debt rates (for bonds).

Also of interest, analysts have noted, is the response of the regulator to the inflationary pressures, as well as the expected exchange rate climate for the next 12 months.

Three quarters of the respondents in the survey told the CBK that they expect the shilling to weaken in the next one year, which coupled with higher inflation could put a stop to the recent monetary policy easing trend.

Economists at Commercial ...
Read More


Category: business opinion news economy markets

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@BusinessDaily

NEWS INDEPTH: Banks, businesses foresee moderate inflation

1 months ago, 7 Nov 18:30

By: Charles Mwaniki

Banks and private sector companies expect the cost of living to rise, but remain contained within the preferred Central Bank of Kenya (CBK) range in the next one year, betting on stable food prices and muted spending pressure due to slow private sector credit growth.

The respondents in CBK’s market perceptions survey of September foresee only a gradual increase in prices of basic consumer goods and services, although their cautious optimism is likely to be tested if oil prices rise in the global market, which would have a significant downstream effect on the Kenyan economy.

The CBK, whose main mandate is price stability, prefers the rate of inflation to remain between 2.5 and 7.5 percent.

The introduction of value Added Tax (VAT) on petroleum products, as well as some basic food items, had been expected to push prices up significantly, but the fall in inflation, the cost of living measure, from 5.7 percent in September to 5.53 percent last month has eased some of these concerns.

The CBK polled a total of 377 companies, comprising 40 commercial banks, 13 microfinance banks and 324 private sector firms, the latter including 45 hotels, for the survey. The overall response rate was 67 percent.

“All respondents expected the increase in inflation to come from the direct impact and second round effects of the VAT on petroleum products, and from the rising international oil prices,” says CBK in the survey report.

“Inflation over the next 12 months, is however, expected to be moderated by the forecast adequate rainfall in most parts of the country, the stable macroeconomic environment, and the slow private sector credit growth.”

"Part of the reason prices have not risen as fast as was expected is due to the low private sector credit growth."

The CBK data shows that credit to the private sector grew at a steady 4.3 percent in June, July and August, but while this is better than the lows of 1.4 percent witnessed during a similar time last year, it is still far below the 12-16 percent range thought to be ideal to spur inclusive economic growth.

In the survey, banks had expected only gradual growth in credit, but it is worth noting that the survey was done before the amendments to the rate cap law in the Finance Act, 2018, which have done away with the deposit rate floor on interest earning accounts.

This should ideally increase the banks’ interest margins. The jury is, however, still out as to whether this will spur an increase in lending, given that maximum allowed loan rates are still at near par with the risk free government debt rates (for bonds).

Also of interest, analysts have noted, is the response of the regulator to the inflationary pressures, as well as the expected exchange rate climate for the next 12 months.

Three quarters of the respondents in the survey told the CBK that they expect the shilling to weaken in the next one year, which coupled with higher inflation could put a stop to the recent monetary policy easing trend.

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