Inflationary Pressures to Average at 10.5Pc in the Second Half of 2017

By Amina Faki

The Kenya Shilling depreciated by 0.1 percent against the dollar last week to close at 103.6 shillings from Kshs 103.6 reported previously.

This was attributed to increased dollar demand from oil importers and a globally strengthening dollar as a result of the 25 bps increase by  the Federal Open Market Committee.

“On a year to date basis, the shilling has depreciated against the dollar by 1.1 percent as the Central Bank of Kenya continues to support the shilling as can be seen by the slight decline in the forex reserves over the last few weeks,” according to Cytonn Investments weekly brief.

On Friday, CBK  intervened in the market on Friday – offering reverse repos worth KES 10 billion – in order to redistribute liquidity in the money market.

Aly Khan Satchu notes that, “The shilling has exhibited extreme alpha and, in fact, is probably the most stable freely traded currency not only in Africa, but in the World.”

For Cytonn, “There was a net liquidity reduction of Kshs 6.8 bn compared to an injection of Kshs 6.3 bn the previous week. The net liquidity reduction was due to T-bill primary issues, Transfers from Banks – Taxes and Reverse repo maturities totaling Kshs 76.2 bn from Kshs 76.4 bn, the previous week.”

Cytonn project that the shilling ‘should’ remain relatively stable in the short term, supported by: 

The Forex Reserve level currently at 8.1 billion US dollars equivalent to 5.4 months of import cover

The IMF precautionary credit facility of 1.5 billion US dollars equivalent to 1.0 more months of import cover that Kenya can utilize to stabilize the shilling in case of adverse movement in the forex market

Increased diaspora remittances that grew by 6.2 percent to 44.7 billion shillings in Q1’2017 from 42.1 billion shillings in Q1’2016.

The inflation rate in the month of June is expected to decline to 10.7 percent from 11.7 percent in May mainly driven by a slowdown in food prices and reduced fuel prices, reported Cytonn Investment.

The report continued by stating that the inflationary pressures to be subdued given that:

The food prices are expected to decline slightly due to the rains witnessed in the period March to June.

Low global prices are expected to subdue the inflationary pressures due to rising US oil production which has suppressed the global recovery of oil prices following OPECs decision to extend the deal to cut down on oil production.