CBK sees inflation remaining within preferred range

Central Bank of Kenya (CBK) governor Patrick Njoroge. FILE PHOTO | NMG

By CHARLES MWANIKI
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Summary

• The Central Bank of Kenya (CBK) expects inflation to remain anchored within its target range in the near term, despite rising food prices that have hit household budgets.
• CBK governor Patrick Njoroge said in a briefing on Thursday that the consistently low core inflation (non-food-non-fuel) should help temper the overall inflation rise.

The Central Bank of Kenya (CBK) expects inflation to remain anchored within its target range in the near term, despite rising food prices that have hit household budgets.

CBK governor Patrick Njoroge said in a briefing on Thursday that the consistently low core inflation (non-food-non-fuel) should help temper the overall inflation rise, while also noting that food inflation remains lower than the double digit highs seen at the end of 2019.

The prices of key food items have been rising in recent weeks, pushing food inflation to a six month high of 7.2 percent in December 2020. Overall inflation in December stood at an eight- month high of 5.62 percent.

Core inflation averaged between 1.6 percent and 2.7 percent in 2020, indicating generally weak demand side pressure as purchasing power in the economy eroded due to Covid related job losses and pay cuts.

“We expect the overall prices to remain anchored and within the target band that we have of five percent plus or minus 2.5 percent,” said Dr Njoroge.

Inflation has kept within the preferred band for the past 40 months, having last exceeded the upper limit of 7.5 percent in August 2017 when it hit 8.05 percent.

Analysts at NCBA said in their review note on last week’s Monetary Policy Committee meeting said that higher VAT and income taxes are set to constrain purchasing power further.

At the same time however, the tax increase and higher oil prices will increase costs of basic goods, posing a situation where demand and supply side inflation are pulling in different directions.

“Demand pressures could ease in coming months as higher taxes constrain disposable incomes, but this could be offset by the recovery in labour markets,” said the NCBA economists.