Cytonn Visions An Increase In August Inflation Rate

“We are projecting the y/y inflation rate for August 2020 to increase marginally to between 4.8 – 5.1 percent compared to the 4.4 percent recorded in July,” says Cytonn in their weekly report.

According to Cytonn, the gains from the stable food prices are watered down by the increasing fuel prices that were announced by the Energy Petroleum and Regulatory Authority (EPRA).

During the month, petrol and diesel prices increased by 3.3 and 3.0 percent, respectively. The increase in pump prices is likely to have upward pressure on the transport index which holds a weighting of 8.7 percent.

“Additionally, we expect the increased fuel prices to not only affect the transport index but also have a trickle-down effect on the prices of other commodity basket food prices due to higher transport costs,” says Cytonn.

The analysts from the real estate firm said that they expect pressures to be experienced in the housing, water, electricity, gas, and other fuels index given the 27.8 percent increase in the price of kerosene.

Food prices have remained relatively stable during the month given the favorable weather and an improvement in agricultural output.

Rates in the fixed income market have remained relatively stable due to the high liquidity in the money markets, coupled with the discipline by the Central Bank as they reject expensive bids.

The government is 141.1 percent ahead of its prorated borrowing target of 74.8 billion shillings having borrowed 180.3 billion shillings.

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“In our view, the government will not be able to meet their revenue collection targets of 1.9 trillion shillings for FY’2020/2021 because of the current subdued economic performance in the country brought about by the spread of COVID-19,” says Cytonn.

Cytonn added that expenditure on Covid-19 has led to a larger budget deficit than the projected 7.5 percent of GDP, ultimately creating uncertainty in the interest rate environment as additional borrowing from the domestic market will be required to plug in the deficit.

“Owing to this uncertain environment, our view is that investors should be biased towards short-term to medium-term fixed income securities to reduce duration risk,” they added.

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