Inflation likely to rise due to El Nino rains, CBK says

By: OTIATO GUGUYU

The Central Bank of Kenya says El Nino rains and a possible rise in the cost of borrowing in the United States may raise inflation.

The US Federal Reserve is likely to increase interest rates on December 16, for the first time in nine years, which is expected to hit emerging markets by a surging dollar and capital outflows.

The El Nino rains that have begun in many areas in the country, and are expected to extend to next year, may also affect food inflation.

The regulator said El Nino rains remain a threat to the stability of food prices if they disrupt the food supply chain.

“Respondents flagged a rise in US interest rates as a risk to the inflation outlook through its impact on the exchange rate,” the CBK said on Tuesday after the monetary policy meeting.

Year on year, consumer prices increased by 6.72 per cent in October compared with 5.97 per cent the previous month after coming down from a high of 7.1 per cent in April.

INFLATION IN CHECK

Inflation has remained within check due to lower oil and food prices, but the CBK is worried that the shilling, which has shed 13 per cent against the dollar since last year, may slip when the Fed raises the rates.

Sudden outflows of dollars may weaken the local currency, raise import prices and send the cost of goods spiralling.

The IMF has warned that Kenya remains susceptible to massive outflows given that it is among the top 10 countries with large portfolio flows that expose them to changes in global investor risk appetites.

The CBK is, however, confident of supporting the shilling with 4.3 months of import cover, translating to $6.7 billion, an increase from $6.1 (3.9 months import cover) in September.

The IMF also approved an additional Sh8 billion precautionary loan to Kenya, giving the regulator access to Sh64.2 billion that can be drawn to protect the shilling from depreciation.

The CBK increased interest rates by three percentage points in June and July but has held it steady at 11.5 per cent during the MPC meeting on Tuesday.

SOURCE: DAILY NATION