Volatility in the oil market and exchange rate instability are emerging as threats to Kenya’s low and stable inflation, Central Bank of Kenya warns.
The CBK governor, Prof Njuguna Ndung’u, said that the weakening of the Kenya shilling against the dollar bears the risk of piling inflationary pressure on the consumer goods market as importers pass on additional costs to consumers.
Commercial banks quoted the shilling at Sh79.40 to the dollar, its lowest level since April 20, 2009 with currency dealers saying it will maintain a weak tone in coming weeks.
The CBK governor, Prof Njuguna Ndung’u, said that the weakening of the Kenya shilling against the dollar bears the risk of piling inflationary pressure on the consumer goods market as importers pass on additional costs to consumers.
Commercial banks quoted the shilling at Sh79.40 to the dollar, its lowest level since April 20, 2009 with currency dealers saying it will maintain a weak tone in coming weeks.
This comes at a time when commodity prices led by oil and metals remain volatile—further making the cost of imported good such as Petroleum products, industrial machinery and second hand cars expensive.
Top threats
CBK said on its latest update on the economy that inflation has ceased to be among the top threats on lower food and electricity prices, but warns that volatile oil prices and exchange rate stability could upset this position.
“Some of these benefits could be offset by oil price movements and risks associated with exchange rate volatility due to the Greek debt crisis,” said Ndung’u while releasing the monetary policy statement last week.
Inflation dropped from a high of 17.9 per cent in September to a single digit regime after the government introduced a new method of calculation.
Month on month inflation stood at 3.7 per cent last month.
A steep rise in energy and capital goods import bill with the weakening of the shilling could become a key driver of inflation.
“Kenya being a net importer, a weak shilling can only increase inflationary pressure,” said Paul Mwai, the CEO of African Alliance Asset Managers.
Pump stations
Economic Survey 2010 indicates that Kenya imported goods worth Sh788 billion in 2009 against exports of Sh323 billion, reflecting a net negative position of Sh465 billion.
A weak shilling is expected to pile pressure on petroleum pricing.
Oil prices rose to $87 a barrel on May 3 but has since fallen to $70 on concerns over the Euro economy, but local dealers reckon that the strengthening of the dollar against shilling could erase the gains at pump stations.
Top threats
CBK said on its latest update on the economy that inflation has ceased to be among the top threats on lower food and electricity prices, but warns that volatile oil prices and exchange rate stability could upset this position.
“Some of these benefits could be offset by oil price movements and risks associated with exchange rate volatility due to the Greek debt crisis,” said Ndung’u while releasing the monetary policy statement last week.
Inflation dropped from a high of 17.9 per cent in September to a single digit regime after the government introduced a new method of calculation.
Month on month inflation stood at 3.7 per cent last month.
A steep rise in energy and capital goods import bill with the weakening of the shilling could become a key driver of inflation.
“Kenya being a net importer, a weak shilling can only increase inflationary pressure,” said Paul Mwai, the CEO of African Alliance Asset Managers.
Pump stations
Economic Survey 2010 indicates that Kenya imported goods worth Sh788 billion in 2009 against exports of Sh323 billion, reflecting a net negative position of Sh465 billion.
A weak shilling is expected to pile pressure on petroleum pricing.
Oil prices rose to $87 a barrel on May 3 but has since fallen to $70 on concerns over the Euro economy, but local dealers reckon that the strengthening of the dollar against shilling could erase the gains at pump stations.
A litre of unleaded fuel is retailing at Sh94 in Nairobi’s Central Business District (CBD) up from Sh77 in April.
Currency dealers say the shilling was a victim of the uncertainty over the direction of the Euro economy, prompting investors to ditch other currencies in favour of the dollar.
Europe is besieged by a debt crisis that began with Greece’s near default that caused jitters over weaker European economies such as Portugal, Spain and Italy.
Currency dealers say the shilling was a victim of the uncertainty over the direction of the Euro economy, prompting investors to ditch other currencies in favour of the dollar.
Europe is besieged by a debt crisis that began with Greece’s near default that caused jitters over weaker European economies such as Portugal, Spain and Italy.
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