According to the Central Bank of Kenya Monetary Policy Committee’s Market Perceptions Survey, inflation is expected to increase moderately over the next twelve months (July 2018-June 2019) because of the newly introduced tax measures.
“Respondents expected a moderate increase in inflation in the period, largely driven by some of the tax measures announced in the FY2018/19 Budget including the impact of VAT on fuel from September 2018, and the reintroduction of VAT on food items such as wheat flour, maize flour and bread, which were previously zero-rated,” the survey reads.
Other factors that are expected to contribute to the increased inflation are “temporary supply shocks emanating from the crackdown on contraband goods including sugar, the effect of the ban on logging on charcoal prices, and the rise in international oil prices and consequent upward pressure on domestic fuel prices.”
On the other hand, the survey indicates that banks and the private sector expect overall inflation in August to remain within the target range of 2.5 to 7.5 per cent.
Exchange Rates Predictions
The Shilling is expected to remain stable in August thanks to adequate foreign exchange reserves, increased remittances, strong tea and horticulture exports, expected increase in foreign exchange inflows from the tax amnesty on repatriated foreign earnings which was extended to 2019 as well as earnings from the tourism sector.
However, the rise in international fuel prices and higher external debt service are expected to threaten the stability of the Kenyan Shilling.
Interestingly, most non-bank private sector firms expect the Shilling to strengthen or remain stable against the USD over the next twelve months while most banks expect a marginal weakening of the Shilling against the USD within the same period.
The forecast by most banks is based on fluctuating oil prices, increased imports, surging interest rates in the US, and comparatively high external debt service.
