Inflation For January To Fall Between 3.8 and 4.2%

Economic analysts from Cytonn Investments have predicted that the inflation rate for the month of January will drop from 5.7 percent in December to range between 3.8 and 4.2 percent.

According to analysts, the decline in inflation rate will be driven by the 8.2 percent decline in petrol prices to 104.2 from 113.5 shillings per liter.

The price of diesel during the month declined by 8.9 percent to 102.2 from 112.3 shillings per liter from the previous month.

The changes in prices have been attributed to the decrease in average landing costs of imported super petrol by 14.9 percent to USD 590.9 per ton in December from USD 694.2 per ton in November.

Landing costs for diesel decreased by 14.7 percent to USD 616.0 per ton in December from USD 722.2 per ton in November.

The decline in the inflation is also likely to be informed by a marginal decline in the food and non-alcoholic index for the month of January due to a decline in prices of several food items, which outweighed the increase in others.

In January, there has been a decline in housing, water, electricity, gas, and other fuels index, as kerosene prices declined by 3.3 percent to 101.7 shillings.

Effects of the lower costs in prices of electricity as from November 2018, which saw the cost of consumption of 50 KWh of electricity declining by 31.4 percent to 758 shillings from 1,105 in October 2018.

The Fixed Income Market

Rates in the fixed income market have remained stable as the government rejects expensive bids despite being 11.5 percent behind its domestic borrowing target.

For the current financial year, the government of Kenya has borrowed 158.2 billion shillings against a pro-rated target of 178.7 billion shillings domestically.

A budget deficit is likely to result from depressed revenue collection is set to create uncertainty in the interest rate environment as any additional borrowing from the domestic market goes to plug the deficit.

“Despite this, we do not expect upward pressure on interest rates due to increased demand on government securities, driven by improved liquidity in the market owing to the relatively high debt maturities,” said Cytonn.

Cytonn says that investors should be biased towards medium-term fixed income instruments to reduce duration risk associated with long-term debt, coupled with the relatively flat yield curve on the long-end due to saturation of long-term bonds.

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