Inflation dipped to a 15-month low in June, but remained in double-digit territory.
A favourable main rainy season (in April and May) and tighter monetary policy helped to cut inflation to 10% year on year in June. As a result, food prices fell by 1.9% (a fifth consecutive decline, from a recent peak of 19.7% in November 2011). Similarly, a slight easing in world oil prices during the second quarter was reflected in local fuel prices, which fell by 0.35%. The housing, water, electricity, gas and other fuels index also fell by 0.2%, reflecting reduced electricity costs. The pressure was also contained somewhat by the buoyancy of the Kenya shilling. After hitting an all-time low of KSh106:US$1 in October 2011, owing to rapid inflation and the recalibration of global risk away from emerging markets, the shilling staged a significant recovery in response to stringent monetary tightening. It stabilised at around KSh83:US$1 in February-April, before edging a little lower in May (to KSh84.4:US$1) and June (to KSh84.8:US$1). However, enduring inflation concerns persuaded the Central Bank of Kenya to keep its benchmark rate on hold at 18% in June, for the seventh month in succession.
Impact on the forecast
We continue to forecast that inflation will average 10.1% in 2012. Thereafter we expect inflation to move within a 5.5-6% range over the remainder of the forecast period, spurred by rising demand and higher electricity prices, although prudent monetary policies, more stable global commodity prices and efficiency gains arising from investment in infrastructure and regulatory reform will help to keep inflation within tolerable bounds.