The election period normally sees accelerated spending as the government races to complete projects to make a better pitch to voters. Chances of a further CBR cut and consequently fall in cost of bank loans will recede in the second half of the year as next year’s general election looms and effects of the recent tax increases start to impact inflation.
The election period normally sees accelerated spending as the government races to complete projects to make a better pitch to voters, which in turn raises pressure on borrowing and interest rates.
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The price of oil has also shown signs of recovery in international markets, which could push inflation upwards with the shilling likely to come under pressure in the wake of Britain’s vote to leave the European Union, commonly known as the ‘Brexit’ a move that could strengthen the dollar in the long term. With minimal room for fiscal expansion, focus on nudging the macroeconomic environment forward is bound to shift to monetary policy with a remote likelihood of a further slash of the benchmark rate between quarters three and four of 2016 as the country races to the 2017 general election cycle.
UPCOMING MARKET EVENT; Central Bank Kenya MPC Meeting – 25th July 2016
The likelihood is remote given that a raft of measures proposed in Budget 2016/17, including an introduction of excise duty and (tax on) beauty products, are likely to see inflation trend upwards in late 2016.
MPC made a 100 basis point cut on the CBR during its last meeting in May, which left the benchmark rate at 10.5 per cent. While inflation in the region is likely to pick up from the current low levels in the second half, I do not expect the pick-up to be significant. This means that there is still potential for a further gradual easing of monetary policy.
The CBK mainly prescribes inflation in its monetary policy stance, with its preferred target range being five per cent plus or minus 250 basis points. Food and transport costs are expected to provide the highest point of inflationary pressure going forward, with the two items already having caused inflation for June to rise to 5.8 per cent from five per cent in May. This is in spite of strong gross domestic product growth of 5.9 per cent in quarter one 2016 and uptick in inflation.
Financial Analyst.
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