CBK boss says his predecessor got it wrong on inflation surge

The Kenya National Bureau of Statistics is later this week expected to publish an update of inflation numbers, with Dr Thugge warning the politically sensitive price pressures are expected to continue for two months amid a lingering global surge in food prices and a hike in various levies such as on fuel, which is expected to impact on consumer goods.

Monday's CBK rate hike in what was Dr Thugge's first meeting as chairman of the apex bank's Monetary Policy Committee (MPC), left borrowers bracing for a big jump in their monthly loan repayments.

"I think, as I explained, the information that the Monetary Policy Committee had when they made that decision to retain the rate of 9.5 per cent was that it looked like inflation was actually coming down, it had come down from 9.2 to 7.9 per cent. And even non-food and non-fuel inflation had also declined," he told reporters during his first post-MPC briefing in Nairobi.

"Their internal projections were in fact that inflation, the near-term inflation would continue to decline. And therefore, at that point when they made that decision, it was not that they had not tightened enough but given the information that they had, perhaps it made sense not to further tighten monetary policy, given that rates were coming down, and that it was expected to go for further deceleration."

Under his leadership, he said, CBK will take deliberate steps to "correct the anomaly."

Dr Thugge noted that the MPC had observed inflation would remain stubborn in the next two months, adding that core inflation - which excludes volatile food and energy prices - is running at above four per cent after surging past three per cent in recent months.

"Of course, as I have explained, since that time, new information has become available, and indeed, inflation pressures have been rising, inflationary expectations have increased and therefore, we found it very necessary to relook at the situation using the new data and new information," he said.

"And that is what informed the Monetary Policy Committee's decision to hike the CBR (central bank rate) by 100 basis points."

The tightening of liquidity is expected to have a negative effect on access to credit for individuals and companies, with borrowers set to feel the financial pain of the increased cost of loans.

The latest revelation by Dr Thugge offers a glimpse of the competing schools of economic thought between the new CBK boss and his predecessor Dr Njoroge, both of whom are ex-International Monetary Fund (IMF) economists. Analysts expect a major policy shift by Dr Thugge from his predecessor.

"Given our economy is highly vulnerable to external shocks given our negative current account deficit, our budget deficit, and weak terms of trade, CBK has to juggle and respond to new information quickly," said Deepak Dave of Riverside Capital.

"It should not be seen as blame-shifting, it is an issue of responsiveness."

MPC on Monday cited the persistent rise in prices of goods and services and the elevated global risks and their potential impact on the domestic economy as some of the major reasons for tightening the supply of money.

"We expect some increase in July. But overall, given the actions that we are now taking, we actually do expect that by August, earliest and latest by September, we expect the overall rate of inflation to come to below the upper range of 7.5 and to be within our target range of between 2.5 and 7.5 per cent," he said.

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