Kenya's MPC sees no risk with domestic inflation

Kenya's inflation rate is likely to remain low in the near future as the performance of east Africa's biggest economy improves, the central bank's Monetary Policy Committee (MPC) said on Friday.

In a statement expounding upon the MPC's decision to keep its key central bank rate (CBR) at seven percent on Tuesday, Central Bank of Kenya Governor Njuguna Ndung'u said overall inflation rates were "low and stable".

Kenya's inflation rate fell precipitously after the statistics agency adopted a new calculation method in October.

It is expected to ease even further with the February data when the country changes the basket of goods it uses to compute inflation, most likely lowering the weighting for food items.

"Given the higher growth prospects for emerging economies in 2010, coupled with the convergence of Kenya's inflation to that of its trading partners ... there are no upside risks to domestic inflation in the near future," the MPC said.

Kenya's inflation rate was at 17.9 percent September but fell to 6.6 percent in October after the calculation change. In comparison, inflation in trading partner South Africa was below six percent in October and November, the committee said.

There was, however, the threat that high fuel prices could put pressure prices. Kenya relies on generators running on diesel for a fair amount of electricity production at the moment after sparse rainfall hit the levels of dams producing power.

Oil prices are, however, rising much slower than would have been expected during the current extreme winter in the northern hemisphere and are unlikely to increase to the record highs seen in mid-2008, the committee said.

The MPC reiterated that the CBR - which the central bank uses to signal where it sees short-term rates - had failed to bring down commercial lending rates, nor lengthen the maturity of loans to the private sector.

The committee asked the central bank to explore ways of restructuring commercial banks' credit markets so that they are more responsive to monetary policy signals.

"The failure of the banking system to extend the maturity of their loan products appears to have been a consequence of the structure of their deposits," the MPC said.

"However, economic growth could be supported by institutional developments that support development banking products and lending to small scale enterprises."

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