Key monetary policy team set to meet as inflation spike looms

The Monetary Policy Committee (MPC) will meet tomorrow for the first time since President Uhuru Kenyatta endorsed imposition of VAT of fuel.

During its last meeting on July 30, the MPC, which is chaired by Central Bank Governor Patrick Njoroge, lowered the Central Bank Rate (CBR) to 9.00% from 9.50%.

The MPC said inflation expectations were well anchored within the target range, and that
economic growth prospects were improving and that economic output was below its
potential level, and there was some room for further accommodative monetary policy.

“Consequently, while noting the risk of perverse outcomes, the Committee decided to lower the
Central Bank Rate (CBR) to 9.00 percent from 9.50 percent,” Njoroge said in a statement.

Cytton has warned that the additional taxes on fuel as well as the housing levy will put a strain on overall consumption because consumers will have to rationalie their consumption on goods and services due to the dilution of their purchasing power, which effectively means a reduction in the quantity of goods and services a single unit of currency can buy.

“This will lead to reduced demand of goods and services across various economic sectors. We also expect inflation to rise in H2’2018 but a lower rate than earlier anticipated due to the halving of the VAT charge on fuel to 8.0% from the earlier 16.0%,” it said in a weekly update.

Apart from the VAT on petroleum products, the Miscellaneous Fees and Levies Act was also amended to introduce an anti-adulteration levy on kerosene at the rate of Kshs 18.0 per litre of the customs value of kerosene payable by the importer at the time of entry of the kerosene into the country.

The high fuel prices have seen a rise in transport costs, which have remained the same despite a warning from President Uhuru Kenyatta, a move that will also impact on the cost of food.

Inflation is however still expected to be within the government set target of 2.5%-7.5%,” Cytton says.

As a result, Cytton says the MPC should adopt a wait and see approach,given the macro-economic environment is relatively stable.

“With inflation having eased to 4.0% from 4.4% since the last meeting despite the currency having depreciated by 0.5% mainly driven by increased dollar demand as the country edged closer to the expiry of the IMF standby precautionary facility, we believe that the MPC should adopt a wait and see approach, given the macro-economic environment is relatively stable. We therefore expect the MPC to hold the CBR at 9.0%,” it says in a currency note.

Despite the National Assembly rejecting to repeal the interest rates capping law, the MPC had held that a preliminary assessment of the impact of the lowering of the CBR in March 2018 showed that
this change under the regime had a smaller and slower impact on key macroeconomic variables such as credit and economic growth. Additionally, the risk of perverse outcomes was not ruled out.

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National Treasury Cabinet Secretary Henry Rotich says the government will revisit the law. MPs only agreed to scrap off the floor rate on deposits which had been pegged on the CBR giving banks room to set their own rates.