Kenya's Annual Inflation Slows to 3.2% in August, Statistics Agency Says

Kenya’s inflation rate fell to 3.2 percent in August, providing support to the central bank’s unexpected decision last month to cut interest rates.

Inflation in East Africa’s largest economy slowed from 3.6 percent a month earlier, the Nairobi-based Kenya National Bureau of Statistics said in a statement on its website today.

Slowing inflation prompted Kenya’s central bank to lower the key lending rate by three-quarters of a percentage point to 6 percent at its last meeting on July 28. The reduction was only forecast by one of four economists surveyed by Bloomberg. A further slowdown in August may not be enough to convince monetary policymakers to prolong an interest-rate cutting cycle, Robert Bunyi, managing director of Nairobi-based Mavuno Capital, said by phone ahead of the announcement.

“They shocked us last time but I think they will err on the side of caution and not lower rates again,” he said. “Inflation looks range-bound in the shorter term, but it could rise.” The government of Kenya is targeting inflation of 5 percent.

Price pressures in Kenya include a weaker currency that has raised the cost of imports and erratic weather that may harm food production, he said. Kenya’s shilling has depreciated 6.7 percent against the dollar since the start of the year.

Inflation slowed in August as the cost of communications, which makes up 3.82 percent of the consumer-price basket, dropped 23.5 percent, the agency said. Mobile-phone operators including Safaricom Ltd., the biggest, and Zain, earlier this month slashed call charges after the industry regulator reduced by half the fee to carry cross-network traffic.

Kenya’s economy is recovering after two years of sluggish growth partly due to drought, with the government forecasting that expansion will accelerate to between 4 percent and 5 percent this year from 2.6 percent in 2009.

The central bank’s monetary policy committee, which sets the key interest rate, typically meets every two months.

To contact the reporter on this story: Sarah McGregor in Nairobi at smcgregor5@bloomberg.net.

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