The National Treasury has retained Kenya’s inflation target range in FY17/18 fiscal year at 5.0 percent with a flexible 2.5 percent margin on either side. This is the sixth time the range has been retained. “The inflation target shall be five per cent, with a flexible margin of 2.5 per cent on either side in the event of adverse shocks,” said Treasury secretary Henry Rotich in a notice to the Central Bank of Kenya. “The flexible margin of 2.5 per cent on either side of the inflation target is to cater for effects of external shocks such as oil price variations and domestic shocks particularly weather related ones. This will help preserve macroeconomic stability and reduce undesirable fluctuations in economic performance.”
Read:Kenya’s 2017-18 budget worsening in fiscal deficit – Analysts In the event deviation falls off the range, CBK will be required to submit a letter indicating factors driving inflation from the target and measure(s) undertaken by the central bank to address the deviation. Inflation has averaged 9.3 percent y/y this year with August print elevated at 8.0 percent y/y. Monetary Policy Committee response to tackle the runaway inflation in the four meetings held this year has been predictably mute undermining its policy transmission mechanism. “In our view, the current policy stance has taken root since the effecting of interest rate cap legislation last September. Our inflation expectation for the remaining third of the year remains elevated above the upper 7.5 percent limit but with: current rate cap regime and subdued private sector credit growth, we opine the CBR will be maintained at 10.0 percent in the upcoming September and November MPC meetings,” states Genghis Capital Analyst. On the other hand, Cytonn Investments expect reduced inflationary pressures, supported by stabilization in food prices, with improved weather conditions in some parts of the country, and a decline in fuel prices, as a result of rising US oil production, which has suppressed the global recovery of oil prices, countering OPECs decision to extend the deal to cut down on oil production.
“However, we expect inflation to average 8.0 percent over the course of the year, which is above the upper bound of the government target range of 2.5 percent – 7.5 percent.” The inflation target is measured by the 12 month increase in Consumer Price Index (CPI) as published by the Kenya National Bureau of Statistics (KNBS).
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