Experts predict tight fiscal regime

May 10, 2011

, NAIROBI, Kenya, May 10 – An economist has predicted a tight monetary policy regime in the country as the Central Bank of Kenya (CBK) comes under increasing pressure to correct the rising cost of living.

Standard Bank Head of African Research Stephen Bailey-Smith said on Tuesday that the CBK needs to tighten monetary policies that tame inflation which soured into double digits in April.

"After sustained years of growth, inflation seems to be quickly picking up. If the Central Bank does not step in then inflation could go as high as 18 percent this year," Mr Bailey-Smith said.

Inflation in April raced to 12.05 percent from 9.19 percent in March, on the back of high fuel and food prices.

The CBK has already signalled its intent to rein in inflation when it raised its benchmark Base Lending Rate to six percent from 5.75 percent in March.

At the time, the economy had come under both domestic and external shocks.

This sent the signal that temporary shocks such as exchange rate volatility and seasonal food shortages should not be allowed to persist lest they affect pricing structures.

However, little has changed since then with commodity and fuel prices surging forward as the shilling continues to face immense pressure from major currencies.

Mr Bailey-Smith said interest rates had failed to keep pace with market dynamics, adding that the CBK needed to stay ahead of the curve.

He said that initial focus had been growth adding that the Central Bank needs to create an avenue that stabilises growth.

"The last couple of years have been much about stimulating growth after the financial economic growth. Now it is a question of managing that boom through stabilising inflation rather than growth promotion," Mr Bailey-Smith said.

At the same time, he faulted the government\’s decision to scrap all taxes on kerosene and slash taxes on diesel in addition to waiving duty on imported maize and wheat.

"That is a fairly dangerous route the government has taken. As a matter of fiscal prudency, this is not desirable because it will pile pressure on the government again when revenue collection is a challenge," he said.

He said that the CBK could also consider temporary controls on capital inflows to mitigate exchange rate volatility in the country.

Standard Bank has forecast the economy to grow at between 4.3 to five percent in 2011.

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