Shoppers stare at price increases as shilling jitters continue

Retail chains are revising upwards the price of commodities they stock and scaling back on expansion plans as the effects of the changing cost of credit and the weakening shilling begins to bite.

Commodities that have been hit include products that are directly affected by immediate changes in import costs such as plastics—or any product that is derived from plastics--and toilet paper. So far, manufacturers and retailers have chosen to absorb the changes in costs in most basic commodities such as unga, bread, milk, cooking oil among others but should the trend continue they will be forced to pass these costs to the end consumer.

“I can tell you that borrower facilities have gone up by 400 basis points (4 per cent) with short term facilities most affected because banks have rushed to adjust interest rates to reflect the Monetary Policy Committee decision,” said Daniel Githua, chief executive of retail giant, Tuskys.

“A rise of four per cent in interest rates is crazy for any businesses which depends on high volume turnover to make profits and with margins of less than 20 per cent.”

Already financial institutions have revised their interest rates to reflect the tight monetary stance. The rise in the cost of credit follows a decision by Monetary Policy Committee (MPC) on July 7, to raise the Central Bank Rate (CBR) — the rate at which it lends to commercial banks — from 10 per cent to 11.5 per cent. The bank also revised the Kenya Bankers’ Reference Rate (KBRR) — a tool that banks use to price their loans to customers — from 8.54 per cent to 9.87 per cent.

MPC took the decision to put breaks on weakening shilling and deter any possible escalation of inflation—which is the general rise in the cost of goods and services in the economy. Willy Kimani, chair of the retailers association reckons an increase in interest rates will soon leave retailers with no option but to pass on the extra costs to the end consumer as profit margins thin out, while the weakening shilling means that retailers cannot budget accurately in the long term.

“If the cost of credit keeps on increasing and the shilling remains volatile, trader margins will be eroded,” said Kimani.

Analysts warn that if this trend is sustained, there will be no option but for traders to pass on the costs to buyer, while retailers will be forced to cut their import and expansion plans from between August to October as landing prices rise.

As the effects of the MPC decision last month begins to bite all sectors of the economy, there is growing debate whether the CBK decision on benchmark rate would result increase prices for a number of essential consumer goods.

“I think CBK actions recently on tightening the policy stance has in the short-term helped stabilise the Shilling,” said Maurice Odoyo, the managing director of NIC Capital.

“On a bigger picture, CBK is more concerned on general price stability as her key mandate. However if the pass through effects of a weaker Shilling jeopardizes their inflation outlook, then my bet would be a further attempt to raise rates.”

Others insist that the Government brought the current predicament on herself because as long as it continues to spend, the tight monetary policy will not bear positive results in taming high inflation and high interest rates.

“We are studying the trend closely and are looking at all options to absorb the effect of the MPC decision including scaling down expansion plans and reviewing the prices of commodities,” said Githua.