Central Bank predicts 5pc inflation in 2018

Kenya’s central bank governor has said he expects inflation of around 5 percent in 2018 and beyond, less than half the rate it reached earlier this year.

Annual inflation shot to a five-year high of 11.70 percent in May, mainly because a regional drought in the first quarter drove up food prices. It dropped to 5.72 percent last month after rainfall improved food supplies.

“Looking forward, inflation is well anchored. There’s no reason for it to deviate from where it is,” Patrick Njoroge told reporters on the sidelines of a conference in Dubai.

The government has a preferred band of 2.5 to 7.5 percent for inflation. Policymakers have held the central bank’s benchmark lending rate at 10 percent since September last year.

Kenya also capped commercial lending rates a year ago at 4 percentage points above the central bank rate and imposed a floor on deposit rates of 70 percent of the central bank rate.

Njoroge said the cap would eventually be removed, but the timing of the move was uncertain. The government has a draft study on the impact of the cap, which bankers want removed.

The study has not been released, but opponents of the cap have been pointing to a slowdown in private-sector credit since it was imposed as evidence of its harmful effect.

Lenders have posted lower profits as the cap hit their net interest income. They have also shifted funds into government securities.

Njoroge also said a binding offer from State Bank of Mauritius is expected in a matter of days to weeks for assets carved out of Chase Bank Kenya, which is in receivership, with the transaction ending by Jan. 1.

“Depositors who are part of this will get 75 percent of their deposits and the remaining 25 percent will remain in the old institution, to be dealt with as we go forward. There will be no haircut,” he said.

Commenting on government borrowing, the governor said Kenya would explore new ways of funding infrastructure projects, such as partnering with private investors, to avoid building up debt.

The national debt rose to 50 percent of gross domestic product this year from 42 percent in 2013, as the government ramped up construction of roads, power plants and a new rail line.

However, Njoroge said the government had enough resources to pay about $700 million in a syndicated loan whose maturity was extended by six months to next year.