Kenya’s latest jump in inflation is unlikely to kick off second-round effects or mark a substantial change in core inflation, its central bank governor told Reuters, hinting the spike was unlikely to lead to a monetary policy change in March.
Patrick Njoroge also said he remained concerned that feeble private-sector credit growth could drag on the economy in the longer term and that “the jury is still out” on the cap imposed on commercial banks’ lending rates last year.
Data released last week showed Kenya’s inflation surging to 9.04 percent year-on-year in February from 6.99 percent a month earlier — well above the central bank’s medium target range of 2.5-7.5 percent in the medium term.
Food price inflation, jumping 16.5 percent due to a shortage of vegetables from some of Kenya’s drought ravaged regions, had been the sole driver behind the increase, Njoroge said.
“It is unlikely to have a substantial impact on overall inflation,” said Njoroge, adding the overall number formed less of a basis for monetary policy or for financial pricing.
He added monetary policymakers in general would always let initial shocks filter through before looking at further impact.
“This is a judgement that the monetary policy committee needs to make, but on the whole I would be very surprised (if) there were significant second order effects from that.”
Kenyan policymakers, who kept interest rates at 10 percent in February, hold their next meeting on March 27.
Speaking in an interview on the sidelines of the Climate Bonds Initiative conference late on Monday, Njoroge said sluggish private sector credit growth could cast a cloud.
Credit growth started to slow down at the end of 2015 after the central bank toughened supervision and stood at 4.3 percent in December — far below the double-digit growth rate the central bank considers ideal.
“I am concerned about it in the long-term if it stays at these low levels,” said Njoroge, adding the bank had collected evidence to establish the structural or cyclical reasons at play. “It will have an impact on growth over the next few months or over the next half year.”
Stalling private sector growth and rising inflation have added to the challenges for President Uhuru Kenyatta who is expected to run for re-election against his main rival Raila Odinga in August by touting a strong economic performance.
Data released last week showed private sector activity barely grew last month as slower credit growth and an ongoing drought weighed on output, hiring and sales.
Looking at the interest rate cap for commercial banks’ lending rates, Njoroge said the availability of credit was a concern for the central bank, especially for small and medium-size enterprises.
In autumn of 2016 and with bad debts surging, legislators introduced a law to cap commercial banks’ lending rates at 4 percentage points above the benchmark interest rate in a move opposed by Njoroge. While average lending rates had come down from 17.7 percent in August 2016 to 13.7 percent in December, this did not reflect the availability of credit, said Njoroge.
“The jury is still out,” he said. “And this will be a problematic thing throughout.”
Speaking of the Kenyan shilling, Njoroge acknowledged the currency had come under pressure between November and January due to a dollar rally fuelled by Donald Trump’s victory in the U.S. Presidential election.
Over the last month, Kenya had seen strong inflows due to receipts from exports and foreign investments, he said.
“On the whole, the FX market has been very balanced with inflows and outflows, and therefore I would be very surprised if there were huge movements.”