East Africa’s inflation rate likely to remain in single digits

Thursday October 13 2016

The prices of goods and services in East Africa

The prices of goods and services in East Africa are likely to remain modest in the last quarter of this year despite worries about too much money chasing few goods in Kenya as politicians spend money to win votes ahead of next year’s general election. TEA GRAPHIC 

By JAMES ANYANZWA

The prices of goods and services in East Africa are likely to remain modest in the last quarter of this year despite worries about too much money chasing few goods in Kenya as politicians spend money to win votes ahead of next year’s general election.

A cross section of analysts polled by The EastAfrican said they expect inflation in the region to remain within the single-digit range largely due to relative stability in crude oil prices and forex markets, though uncontrolled spending by politicians could push East Africa’s biggest economy into a demand-pull inflation.

In the eight months to August, the overall inflation in Kenya, Uganda, Tanzania and Rwanda averaged 5.9 per cent.

The cost of living was highest in Kenya, with prices of goods and services increasing at the rate of 6.25 per cent followed by Rwanda at 6.1 per cent; Uganda at 5.8 per cent; and Tanzania at 5.4 per cent.

In September, Kenya’s overall inflation rose to 6.36 per cent from 6.26 per cent in August on the back of a rise in prices of food, housing, water, electricity, gas and clothing. Medical, restaurant and hotel costs also increased during that period, according to the Kenya National Bureau of Statistics.

Uganda’s headline inflation slowed to 4.2 per cent in September 2016, from 4.8 per cent in the same period, while Tanzania's was down to 4.5 per cent in last month from 4.9 per cent in August. Rwanda's inflation eased to 5.8 per cent from 6.4 per cent.

“We expect inflation to remain around current levels. Not much price volatility is being experienced in the region. Oil prices have remained relatively stable and currency movements have been minor due to an adequate monetary policy,” said Daniel Kuyoh, a senior investment analyst at Alpha Africa Asset Managers.

“In Kenya, we expect much more money in circulation in the run-up to the election. We could possibly see a weaker shilling as we inch closer to the election as well as higher inflation,” added Mr Kuyoh.

Price stability

Kenya’s year-on-year food inflation stood at 10.94 per cent in September although the cost of transport went down by 0.3 per cent in September from August, mainly on account of a decline in the pump prices of petrol and diesel.

Crude oil prices fell to as low as $26.21 per barrel earlier this year after reaching monthly peaks of $112 per barrel and $105 in June 2014.

However the Organisation of Petroleum Exporting Countries has agreed to cut output to between 32.5 million and 33 million barrels a day, with their sights set on a sustained oil price of $50- $60 per barrel.

“I expect inflation in the region to remain relatively stable because the key factors of oil prices and forex markets have stabilised a little. I don’t expect significant risks on inflation unless there are spikes in oil prices,” said Paul Mwai, chief executive of AIB Capital, adding, “In Kenya, I really don’t expect the elections to have a major impact on inflation except when politicians’ spending results in redistribution of income. That can have an impact, but only a slight one. I don’t think it will push up inflation significantly. What we should be worried about is oil prices, exchange rate depreciation and drought, which will affect food production.”

The inflation rate in Rwanda is expected to reach 7.9 per cent by the end of this quarter, according to analysts.

Kenya’s Central Bank said it expects inflation to fall towards the end of the year as the currency remains broadly stable, supported by a narrowing of the current account deficit given increased earnings from tourism, tea and horticulture as well as a low oil import bill.

Central Bank of Kenya Governor Patrick Njoroge said general prices of goods and services in the economy could decline in the short-term due to moderate demand pressure on inflation.

Analysts at Cytonn Investments Ltd expect inflation in East Africa to remain in single digits with Kenya maintaining its band target at between 2.5 per cent and 7.5 per cent in the fourth quarter (October-December).

“We expect the inflation rate to remain below the CBK’s upper limit of 7.5 per cent,” said Cytonn Investments Ltd.

Global growth

According to the International Monetary Fund, global growth was 3.1 per cent in 2015 and is expected to remain modest at 3.2 per cent in 2016, before picking up gradually to 3.6 per cent in 2017, though the slowdown in the Chinese economy has led to persisting low commodity prices.

According to the African Development Bank, East Africa’s relatively high rates of growth in 2015 are expected to continue in 2016/17.

The region recorded an average growth of 6.3 per cent in 2015 and is expected to hit 6.4 per cent in 2016.