MPC meets as tax-driven inflation jitters increase

The Central Bank of Kenya (CBK) policy-making body will hold its bi-monthly meeting Tuesday with tax-instigated consumer and producer inflation the key issue on the table.

The introduction of an eight per cent value-added tax (VAT) on petroleum products and other levies are tipped to drive headline inflation in the coming months.

Analysts were earlier divided over the likelihood of the central bank’s rate-setting Monetary Policy Committee (MPC) keeping the benchmark at nine per cent.

During the last sitting on July 30 the MPC cut the benchmark lending rate by 0.5 percentage point, signalling a drop in the cost of loans by a similar margin.

Three of the five analysts polled tipped the CBK to keep the key rate at nine per cent while the rest expect a cut of about 50 per cent.

Those who are looking at a retention noted several uncertainties, including the troubled transmission of monetary policy in the current environment as well as potential external challenges.

“We expect the CBK to hold interest rates given a number of uncertainties, including the transmission of monetary policy in the current environment (loan rate cap in place, but the deposit floor has gone) and external uncertainties — a sell-off in key emerging markets that could yet threaten inflows into frontier and emerging economies more significantly,” said Razia Khan, chief economist for Africa at Standard Chartered.

Kenya’s inflation dropped slightly in August compared to the previous month due to lower vegetable and flour prices.

The rate fell to 4.04 per cent, from 4.35 per cent in July, the Kenya National Bureau of Statistics (KNBS) said. It is now expected to rise due to high oil prices.