Stronger shilling slated to further ease cost of living

A vegetable and fruit seller in Nyeri. FILE PHOTO | NMG 

By CHARLES MWANIKI

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Summary

• The stable post-election outlook is helping calm the markets, preventing secondary pressure on cost of goods and services in the country.
• The shilling has gained in the post-election period and was yesterday exchanging at 103.10 to the dollar as per CBK indicative rates compared to 103.90 two weeks ago. 
• Investors who had been stocking up on dollars before the election are now buying back the shillings from the market.

The recent strengthening of the shilling is set to further ease the cost of living for Kenyans as imported inflation comes down, in turn reducing pressure on the Central Bank of Kenya (CBK) to ease monetary policy this year.

Economists at Commercial Bank of Africa say the stable post-election outlook is also helping calm the markets, preventing secondary pressure on cost of goods and services in the country.

The shilling has gained in the post-election period and was yesterday exchanging at 103.10 to the dollar as per CBK indicative rates compared to 103.90 two weeks ago. 

Investors who had been stocking up on dollars before the election are now buying back the shillings from the market.

“While further (shilling) recovery may be measured given the country’s twin current account and fiscal deficits coupled with a relatively weak macroeconomic backdrop, the gains so far could help moderate expectations, as exposure to imported inflation reduce. This coincides with a period of persistently low oil prices and diminishing effects of drought on food prices,” reads the latest CBA weekly fixed income report.

“With a stronger currency, underlying inflation pressures may remain contained, providing more headroom for further policy accommodation.” Imported inflation comes up as a result of a rise in the cost of imported raw materials used to make locally produced goods.

READ: Kenya shilling slightly firmer, eye on political developments

The CBA economists, however, do not expect CBK to move ahead and ease monetary policy this year, saying that the regulator is likelier to prioritise making the policy transmission more effective, especially in light of the rate cap law.

Inflation had risen to a five-year high of 11.7 per cent in May due to high food prices, but has since eased down to 7.47 per cent last month, below the preferred ceiling of 7.5 per cent.

Genghis Capital analyst Churchill Ogutu says in the firm’s August macroeconomic and fixed income update that inflationary pressure caused by low supply of goods due to reduced productivity in the economy is also easing.

“This is largely on account of improved weather conditions in the period and impact of the government food subsidy programme,” says Mr Ogutu.