Kenya’s Ndung’u Sees Inflation Slower as Shilling Stabilizes

Kenyan central bank Governor Njuguna Ndung’u said adequate food and energy supplies in the next few months should guide inflation to within its target range as the shilling is poised to remain stable.

“Food supply is going to be as predicted given the short rains now starting; secondly, we are not going to have energy prices disturbing the economy given the trends we have seen so far internationally,” Ndung’u, 54, said in an interview on Nov. 4 in the capital, Nairobi. “We are not anticipating any supply shocks in the coming few months, so essentially we are confident that we will come back to the target.”

The annual inflation rate of East Africa’s biggest economy declined to 7.8 percent in October from 8.3 percent in September, exceeding the upper limit of the central bank’s 2.5 percent to 7.5 percent target band for a second consecutive month. The central bank’s Monetary Policy Committee yesterday left its policy rate unchanged for a third successive meeting at a two-year low of 8.5 percent, saying price pressures are under control and that the market expects the economy will grow.

Gross domestic product is forecast by the government to rise by 5.5 percent to 6 percent this year from 4.6 percent in 2012. Treasury Secretary Henry Rotich last month said he sees limited economic impact on the country from a four-day attack by Islamist militants on a Nairobi shopping mall in September that left at least 67 civilians and security forces dead.

Target Breach

Inflation breached the target range after the government applied a 16 percent value-added tax to a wider range of products in September, triggering a one-time rise in consumer prices, not an underlying shift, Ndung’u said.

“VAT was a one-off, a blip for one month,” he said. “There were no fundamentals driving inflation.”

Kenya’s government also cut fuel prices last month as a stronger shilling curbed import costs. The currency declined less than 0.1 percent to 85.38 per dollar by 2:24 p.m. in Nairobi, paring its gain since the start of September to 2.5 percent.

“Stability in the exchange rate comes because confidence in the market is returning,” Ndung’u said. “We have seen increases of foreign-exchange inflows including remittances.”

The shilling has advanced 25 percent since trading at a record low of 106.75 per dollar in October 2011 following a drought that drove up food prices. Inflation soared to 20 percent and the bank raised borrowing costs to a record 18 percent to help bolster the currency and curb price pressures. Food is the largest component in the consumer-price basket with a 36 percent weighting.

Confidence Improving

Confidence in the economy is improving after peaceful elections in March, Ndung’u said. The vote was the first since a disputed election in December 2007 in which more than 1,100 people died in two months of ethnic clashes. President Uhuru Kenyatta, a former finance minister and deputy prime minister, replaced Mwai Kibaki in this year’s largely peaceful election.

Growth on an annual basis slowed in the second quarter to 4.3 percent compared with 5.2 percent between January and March, according to the latest data from the country’s statistics bureau. Economic expansion, like in other emerging markets, is stoking investor interest, Ndung’u said.

“I would not be worried with second-quarter growth in Kenya because it is not a good reflector of how growth should be,” Ndung’u said. “The government was forming, there were so many transitional issues, and in the first month there was a petition” challenging the vote results.

Market Excuses

“All these aspects tend to give the market an excuse to develop a waiting option until the path of government policy is clear and communicated,” he said. “That is why we can start looking at the third and fourth quarters of 2013 to make a full assessment.”

Kenya is preparing to issue its first sovereign bond by early next year to raise as much as $2 billion, partly to pay off a $600 million syndicated loan and to invest in infrastructure development including railways and power generation.

“There are many people investing in emerging markets for various reasons,” said Ndung’u. “The frontier and emerging markets are where returns are positive in real terms.”

Kenya’s current account deficit was about 7.5 percent of gross domestic product in September, compared with 10.5 percent in December 2012, narrowing after the bank changed the way the calculation is done, Ndung’u said.

“This is the true reflection of the current account deficit” that follows “the correct computations,” he said.

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