Inflation is Rising: Should MPC unleash ‘shocks and awe’?

How aggressive will be the Central Bank of Kenya (CBK) be ahead of the MPC meeting tomorrow?

Consumers and investors alike will be zeroing in on the Central Bank’s Monetary Policy Meeting (MPC) Tuesday amid concerns of the rising cost of basic commodities that has driven the inflation to an eight-year high.

The prices of key food items like maize flour, milk and wheat products have jumped considerably in the last few months, straining the majority of Kenyan households that are still dredging from the economic hardships left by Covid-19 plague.

Consumer inflation quickened for the fourth consecutive month hitting a high of 6.5 percent in April, up from 5.6 percent in March with the Kenya National Bureau of Statistics (KNBS) noting that such a rise was the highest seen for more than eight years.

Ahead of the crucial Monday meeting, a research communication by the Kenya Bankers’ centre for research on financial markets and policy, has urged for a hard-nosed resolution by the officials at the country’s apex bank to address the inflationary pressures, albeit with restraint.

“Inflationary expectations are not well anchored. There is a need to tighten monetary policy stance to rein in inflationary expectations and support macroeconomic stability in the near-to medium term,” it noted.

MPC’s base rate is unlikely to change for the remainder of the year, but given the need to stimulate economic growth which is projected to slacken this year on high fuel prices and the looming August polls, MPC will be riddled on how it balances between stirring the economic recovery policies while also remaining ‘faithful’ to the worried Wanjiku.

last week Kenyan lawmakers yielded to public pressure and shot down many proposals by the National Treasury that would have seen a further rise in the cost of living.

Proposals in the Finance Bill 2022 had suggested among other scoffs an increase in value added tax on maize and wheat flour, which are primary meals consumed in many households.

Inflation – which is the rate at which the value of a currency is falling and, consequently, the general level of prices for goods and services is rising, has continued to build up on account of rising oil prices triggered by the ongoing Russia-Ukraine war and its direct impact of a weaker currency via imported inflation.

The Kenyan Shilling against the US dollar exchange rate transacted at Sh116.47 at the close of NSE -trading yesterday in what has been a consistent but perturbing dip in its value against major currencies.

For now it appears, some analysts are coming around to the MPC’s way of thinking on inflation.

“It is a tough balancing act but there’s no need to panic especially for investors keen to spend locally. The elections will also come and go – we are good,” offered Peter Macharia – an economist.

MPC has consistently maintained that it has the tools to deal with accelerating inflation, this despite acknowledging that it was somewhat unwilling to respond to rapid inflation last year, a delay that may force it and relevant agencies like KRA and the national treasury to constrain the economy abruptly now – and one that could hold lessons for the policy path in the future.

“The Committee will closely monitor the impact of the policy measures, as well as developments in the global and domestic economy, and stands ready to take additional measures as necessary. But MPC remains ready to re-convene earlier if necessary,” noted CBK’s Governor Patrick Njoroge in the last MPC meeting in March.

Those concerns saw both the Parliamentary Budget Office (PBO) and Fitch Solutions revise Kenya’s economic growth this year from 6 per cent to 4.9 per cent and the latter downgrading growth forecast to 4.72 percent from 5.0 percent.

Kenya’s economy is projected to have grown by 7.5 percent in 2021. MPC decided to retain the Central Bank Rate (CBR) at 7.00 percent, it could keep it that way in its next sitting.