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Weak demand to keep inflation rate in check

by biasharadigest
Commodities

Weak demand to keep inflation rate in check

Food inflation, which has been the key driver of the cost of living in the past few months, came down to 8.1 per cent in June from 10.6 per cent in May
Food inflation, which has been the key driver of the cost of living in the past few months, came down to 8.1 per cent in June from 10.6 per cent in May. FILE PHOTO | NMG 

Weak demand for goods due to the effects of Covid-19 on the economy will keep inflation towards the lower end of the Central Bank of Kenya’s (CBK) preferred range in the third quarter of the year, despite an increase in fuel prices that would normally push the cost of living higher.

Analysts at city-based investment bank Genghis Capital said in a third-quarter macroeconomic report they see inflation averaging about 4.5 per cent over the three months ending September, attributed to muted consumption side pressure.

Private sector players the CBK polled in its June Monetary Policy Committee market perceptions survey also said they expect inflation to remain stable, anchored by lower food prices, the reduction in value-added tax and low demand for goods.

Kenya’s inflation stood at a nine-month low of 4.59 per cent in June, dropping from 5.33 per cent in May.

“The depressed consumption trend in the economy implies inflationary pressures cooled. In fact, disinflation has been salient from the latest prints,” said Genghis Capital.

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“Furthermore, the subdued imports in the near-term means that the risk of imported inflation remains muted. That said, we flag off the recent price action in the global oil markets.”

The CBK sets the target of inflation at five per cent, plus or minus 2.5 percentage points.

In the MPC survey, the respondents, drawn from commercial banks, microfinance banks and non-bank private sector companies said they see inflation averaging between 5.6 and 6.1 per cent in the next 12 months.

Food inflation, which has been the key driver of the cost of living in the past few months, came down to 8.1 per cent in June from 10.6 per cent in May, while core inflation (non-food-non-fuel) eased further to 1.6 per cent from 1.8 per cent, pointing to low demand across the general economy.

“Regarding expected inflation for the 12 months, respondents largely expected it to remain within the target range supported by favourable weather and relatively low oil prices,” said CBK in the survey report.

“However, respondents cited the possibility of a further increase in prices if the pandemic escalates leading to reduced production as a result of supply chain slowdowns of inputs like fertilisers, fuel, labour, machinery etc, and the final produce to markets.”

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