Inflation @ 4.14%..CBR @11%..What Next?

Inflation rates for the month of October followed a trend that has been in existence since the CBK decided to take the monetary stance late last year. By maintaining the CBR at 18% for about seven months, CBK was able to tame the inflation rates in our economy. Since then, the inflation rates have been easing each month and the latest results for October were no exceptional; falling to 4.14% from 5.32% in the month of September.

The fall of the inflation rates have then been creating room for further reduction of CBR by the CBK. The pressure put on CBK by the very low inflation rates seem to be yielding results; CBK is also dancing in the same rhythm by lowering the CBR. But do this mean for us?

One, money is going to be cheap and therefore there will be more borrowing in the economy. Banks will be willing to lend more to the public at higher rates other than lend treasury at the lower rates. If the latest credit report from CBK is anything to go by, then the rise in private sector lending experienced in the past quarter might be replicated in this last quarter of the year.

More borrowing means there will be more money in circulation in the economy, which translates to higher purchasing power. The higher purchasing power will then fuel demand for goods and services by the consumers. Since the producers and suppliers too will be having access to credit cheaply, they will be tempted to borrow more in order to produce more and supply the additional demand.

But producers and suppliers can only borrow too much since they have the profit motives to achieve and their capacity may be limited. In essence, this will eventually create demand pull inflation, taking us back to another cycle rising commodity prices.

With rising inflation, the Kenyan shilling will then start depreciating against major world currencies putting us in a more complicated position with regard to international trade. The group that will gain being the exporters due to rise in demand of our cheap exports as a unit dollar will afford more commodities due to the depreciated shilling.

However, Kenya being a net importer, we stand to feel the pinch from the depreciation since we will require more of the shillings to afford the same amount of commodities we import now. This then may translate to the government borrowing more to meet its import requirements, thus widening our current deficit which now stands at around 11%.

Now that is the tentative unfolding of events, though other factors like international oil prices, the looming recession in the euro zone and other local and international factors may tilt the situation either positively or negatively. We however hope for the best and wish that our policy makers are playing with their lever well to maintain a balance.

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